[Federal Register Volume 68, Number 165 (Tuesday, August 26, 2003)]
[Rules and Regulations]
[Pages 51394-51417]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-21354]



[[Page 51393]]

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Part III





Department of the Treasury





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Internal Revenue Service



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26 CFR Parts 1 and 602



Exclusions From Gross Income of Foreign Corporations; Final Rule

  Federal Register / Vol. 68, No. 165 / Tuesday, August 26, 2003 / 
Rules and Regulations  

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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Parts 1 and 602

[TD 9087]
RIN 1545-BA07


Exclusions From Gross Income of Foreign Corporations

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulations.

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SUMMARY: This document contains final regulations implementing sections 
883(a) and (c) that relate to income derived by foreign corporations 
from the international operation of ships or aircraft. The final 
regulations reflect changes made by the Tax Reform Act of 1986 and 
subsequent legislative amendments. The final regulations provide, in 
general, that a foreign corporation organized in a qualified foreign 
country and engaged in the international operation of ships or aircraft 
shall exclude qualified income from gross income for purposes of U.S. 
Federal income taxation, provided that the corporation can satisfy 
certain ownership and related documentation requirements. The final 
regulations explain when a foreign country is a qualified foreign 
country and what income is considered to be qualified income. The final 
regulations specify how a foreign corporation may satisfy the ownership 
and related documentation requirements. In addition, the final 
regulations describe the information that the foreign corporation must 
include on its U.S. income tax return in order to claim an exemption. 
All foreign corporations engaged in the international operation of 
ships or aircraft that claim an exemption from U.S. Federal income tax 
based on section 883 are affected by these regulations.

DATES: Effective Date: These regulations are effective August 26, 2003.
    Applicability Date: These regulations are applicable to taxable 
years of the foreign corporation beginning 30 days or more after August 
26, 2003.

FOR FURTHER INFORMATION CONTACT: Patricia A. Bray or David L. Lundy at 
(202) 622-3880 (not a toll-free number).

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

    The collections of information contained in these final regulations 
have been reviewed and approved by the Office of Management and Budget 
in accordance with the Paperwork Reduction Act (44 U.S.C. 3507) under 
control number 1545-1677. Responses to these collections of information 
are mandatory.
    An agency may not conduct or sponsor, and a person is not required 
to respond to, a collection of information unless the collection of 
information displays a valid control number assigned by the Office of 
Management and Budget.
    For corporations, the estimated annual burden per respondent varies 
from 30 minutes to eight hours, depending on the individual 
circumstances of the foreign corporation, with an estimated average of 
one hour. For shareholders, the estimated annual burden per respondent 
varies from zero minutes to eight hours, depending on the individual 
circumstances of the shareholder or intermediary, with an estimated 
average of 90 minutes.
    Comments concerning the accuracy of this burden estimate and 
suggestions for reducing this burden should be sent to the Internal 
Revenue Service, Attn: IRS Reports Clearance Officer, W:CAR:MP:T:T:SP, 
Washington, DC 20224, and to the Office of Management and Budget, Attn: 
Desk Officer for the Department of the Treasury, Office of Information 
and Regulatory Affairs, Washington, DC 20503.
    Books or records relating to this collection of information must be 
retained as long as their contents may become material in the 
administration of any internal revenue law. Generally, tax returns and 
tax return information are confidential, as required by 26 U.S.C. 6103.

Background

    A notice of proposed rulemaking (REG-208280-86) under sections 
883(a) and (c) was published in the Federal Register (65 FR 6065) on 
February 8, 2000 (the 2000 proposed regulations). Due to the 
substantial number of comments that were received on the 2000 proposed 
regulations, and the significant impact the regulations have on large 
segments of the shipping and air transport industries, the 2000 
proposed regulations were withdrawn on August 2, 2002. A revised notice 
of proposed rulemaking (REG-136311-01) was published in the Federal 
Register (67 FR 50510) on August 2, 2002 (the proposed regulations), 
and provided an opportunity for additional comments. A public hearing 
on the proposed regulations was held on November 25, 2002. Numerous 
comments have been received. After consideration of all the comments, 
the proposed regulations are adopted as revised by this Treasury 
decision.
    The preamble to the 2000 proposed regulations contains a detailed 
explanation of the provisions in the 2000 proposed regulations, and the 
preamble to the proposed regulations describes the comments received on 
the 2000 proposed regulations and the consequent changes reflected in 
the proposed regulations. The explanations contained in those preambles 
are not repeated herein. The comments submitted to the IRS on the 
proposed regulations and the consequent changes reflected in the final 
regulations are described herein.

Public Comments

Comments Relating to Sec.  1.883-1: Exclusion of Income From the 
International Operation of Ships or Aircraft

A. Substantiation and Reporting Requirements
    For a foreign corporation to be considered a qualified foreign 
corporation under Sec.  1.883-1(c)(3), the proposed regulations require 
that the corporation provide on its return a reasonable estimate of the 
amount of income in each category of qualified income for which an 
exemption is claimed to the extent such amounts are readily 
determinable. Commentators criticized this requirement on the ground 
that it could require the creation of a separate accounting system, and 
would necessitate the allocation of expenses to each of the specific 
categories of income. Commentators suggested that whether amounts are 
readily determinable should depend on whether records to ascertain such 
amounts are available in the ordinary course of business.
    The IRS and Treasury believe that the suggested definition of 
readily determinable does not ensure that adequate records will be 
maintained. That term should be interpreted in accordance with Sec.  
1.6012-2(g)(1)(i). However, the final regulations have been revised to 
clarify that a reasonable estimate of the gross amount of income in 
each category is required. Accordingly, there is no requirement that 
expenses be allocated to each category of income.
B. Operation of Ships or Aircraft
    Section 1.883-1(e) of the proposed regulations provides generally 
that a corporation is considered engaged in the operation of ships or 
aircraft only when it is an owner or lessee of an entire ship or 
aircraft used in the carriage of passengers or cargo for hire.

[[Page 51395]]

Commentators said that a shipping company utilizing less than the 
entire space on several vessels also should be considered engaged in 
the operation of ships or aircraft. The final regulations do not adopt 
this suggestion. The IRS and Treasury believe that it is appropriate to 
consider a foreign corporation to be engaged in the operation of ships 
or aircraft for purposes of section 883 only when it is an owner or 
lessee of an entire ship or aircraft.
C. Pool, Partnership, Strategic Alliance, Joint Operating Agreement, 
Code-Sharing Arrangement or Other Joint Venture
    Section 1.883-1(e)(2) generally treats a foreign corporation as 
engaged in the operation of ships or aircraft with respect to its 
participation in a pool, partnership, strategic alliance, joint 
operating agreement, code-sharing arrangement or other joint venture. 
Commentators asked that these rules be made applicable to single-member 
disregarded entities in addition to arrangements with multiple owners. 
Commentators also asked for clarification concerning whether these 
rules apply to tiered partnerships, such as in the case of a foreign 
corporation that is a partner in a partnership, whose sole activity is 
to be a partner in another partnership that is engaged in international 
shipping.
    The rules have been revised to cover single-member disregarded 
entities, and to clarify that they apply to tiered entities in the case 
of both joint venture entities and joint ventures that are not 
entities. An example was added to illustrate these revisions.
D. Cruises to Nowhere
    Section 1.883-1(f)(1) excludes from the international operation of 
ships or aircraft the carriage of passengers or cargo on a voyage or 
flight that begins and ends in the United States, even if the voyage or 
flight contains a segment extending beyond the territorial limits of 
the United States, unless the passenger disembarks or the cargo is 
unloaded outside the United States. Commentators renewed their 
objection to this exclusion of such ``cruises to nowhere.'' The final 
regulations continue to exclude cruises to nowhere because such travel 
has beginning and ending points within the United States within the 
meaning of section 863(c)(1).
E. Determining Whether Income Is Derived From International Operation 
of Ships or Aircraft
    Section 1.883-1(f)(2) of the proposed regulations provides that 
whether income is derived from international operation of ships or 
aircraft is determined on a passenger by passenger basis and on an 
item-of-cargo by item-of-cargo basis. Commentators suggested that with 
respect to the carriage of passengers by ship, the determination should 
be made on a voyage by voyage basis. Commentators said the voyage 
should be treated as international if it cannot be completed because of 
weather or similar factors.
    The final regulations do not adopt the suggestion that income be 
determined on a voyage by voyage basis. The regulations have been 
revised, however, to exempt income from the sale of a ticket for 
international carriage of a passenger when the passenger does not begin 
or complete an international journey because of unanticipated 
circumstances. For example, if a passenger does not leave on an 
international flight because of a change in plans, or is unable to 
complete an international voyage because of illness, any income derived 
from the sale of the ticket nonetheless will qualify for exemption.
F. International Carriage of Cargo
    Under Sec.  1.883-1(e)(1), a foreign corporation is considered 
engaged in the operation of ships or aircraft only if the ship or 
aircraft is used in the carriage of passengers or cargo for hire. 
Commentators pointed out that the regulations do not define the term 
for hire. They expressed concern that requiring the carriage of cargo 
for hire might be interpreted to exclude income derived by a vessel 
owner or operator who charters a vessel to a lessee, if the lessee uses 
it to transport the lessee's own cargo or repositions the vessel 
without cargo on board for its next voyage. Commentators suggested that 
the term for hire be defined to include carriage of proprietary goods 
and an empty backhaul voyage, or that it be deleted from the 
regulations.
    Section 1.883-1(f)(2)(iv) of the final regulations provides that if 
a foreign corporation time, voyage, or bareboat charters out a ship or 
aircraft, and the lowest-tier lessee uses the ship or aircraft to carry 
passengers or cargo on a fee basis, the ship or aircraft is considered 
used to carry passengers or cargo for hire, regardless of whether the 
ship or aircraft may be empty during a portion of the charter period 
due to a backhaul voyage or flight or for purposes of repositioning. If 
a foreign corporation time, voyage, or bareboat charters out a ship or 
aircraft, and the lowest-tier lessee uses the ship or aircraft for the 
carriage of proprietary goods, including an empty backhaul voyage or 
flight or repositioning related to such carriage of proprietary goods, 
the ship or aircraft similarly will be treated as used to carry cargo 
for hire.
G. Bareboat Charter of Ships or Dry Lease of Aircraft Used in 
International Operation of Ships or Aircraft
    When a foreign corporation bareboat charters a ship or dry leases 
an aircraft to a lessee, Sec.  1.883-1(f)(2)(iii) of the proposed 
regulations requires the corporation to adopt a reasonable method for 
determining the amount of charter income attributable to the 
international operation of ships or aircraft by the lowest tier lessee. 
The regulations contain two ratios that may provide a reasonable method 
for determining the amount of qualifying charter income.
    Commentators asked for clarification that business records or log 
books are a reasonable method for determining the amount of charter 
income when those records show that the vessel has been used 
exclusively in international transportation. Commentators also asserted 
that the ratios are unnecessary and suggested that they be deleted.
    The IRS and Treasury believe that business records or log books 
showing that a ship or aircraft has been used exclusively on voyages or 
flights that begin or end in the United States (but not both) may be 
sufficient to establish that the foreign corporation's entire gross 
income is income from the international operation of ships or aircraft. 
However, if the ship or aircraft also has been used on voyages or 
flights that begin and end outside the United States, the foreign 
corporation must determine the amount of the charter income that is 
attributable to voyages or flights that begin or end in the United 
States (but not both) to determine the amount of income potentially 
within the scope of section 883. The final regulations have been 
revised generally to require such a foreign corporation to determine 
the amount of such income based on the total number of days of 
uninterrupted travel on voyages or flights between the United States 
and the farthest point or points where cargo or passengers are loaded 
en route to, or discharged en route from, the United States. However, 
the final regulations permit the foreign corporation to adopt an 
alternative method for determining the amount of the charter income 
that is attributable to the international operation of ships or 
aircraft if it can establish that the alternative method more 
accurately reflects the amount of such income.

[[Page 51396]]

H. Activities Incidental to the International Operation of Ships or 
Aircraft
    Section 1.883-1(g) of the proposed regulations provides that 
certain activities of an operator of a ship or aircraft are so closely 
related to the primary activity of the international operation of ships 
or aircraft that income from those incidental activities shall be 
considered income from the international operation of ships or 
aircraft, and thus eligible for exemption.
Intermodal Containers
    Section 1.883-1(g)(1)(x) of the proposed regulations treats certain 
container rental activities in the United States as incidental to the 
international operation of ships or aircraft. The regulations limit 
incidental treatment to the rental of containers for use in the United 
States for a period not exceeding five days beyond the original 
delivery date to the consignee as stated on the bill of lading, and 
also impose other limitations on incidental treatment.
    Commentators stated that ocean carriers provide containers to their 
customers as an integral part of international shipping, but do not 
``rent'' containers or provide them for ``temporary warehousing'' of 
cargo. Commentators also noted that deliveries can be delayed beyond 
five days for many reasons that clearly do not involve warehousing, 
such as congestion at port facilities. Commentators said it would be 
difficult and unrealistic to allocate a portion of the shipping charges 
to the use of containers.
    For these reasons, the reference to container rental as an 
incidental activity has been modified. The ``five day'' rule has been 
eliminated and replaced with a more flexible rule under which the 
provision of containers or other related equipment by the foreign 
corporation in connection with the international carriage of cargo for 
use by its customers, including short-term use within the United States 
immediately preceding or following the international carriage of cargo, 
is considered an incidental activity. The regulations presume that a 
container is used in connection with the international carriage of 
cargo if it is used for a period of five days or less immediately 
preceding or following the international carriage of cargo. Beyond this 
five-day period, whether a container is being used in connection with 
the international carriage of cargo, or for some other purpose such as 
warehousing of cargo, will depend on the facts and circumstances. The 
regulations make clear that the use of containers for any such other 
purpose will be considered to give rise to income that is not 
incidental to the international operation of ships or aircraft.
Hotel Accommodations
    Arranging for one night in a hotel within the United States before 
or after a cruise is considered incidental to the international 
operation of ships under Sec.  1.883-1(g)(1)(vii) of the proposed 
regulations. Commentators suggested that the exception also should 
apply to one-night hotel accommodations arranged by airlines. 
Commentators said that airlines occasionally provide such 
accommodations to passengers on tour packages for the same reasons that 
cruise companies provide accommodations. The final regulations do not 
adopt this suggestion. The IRS and Treasury believe that different 
rules are appropriate in light of operational differences between the 
airline and cruise industries.
Inland Transportation of Cargo
    Section 1.883-1(g)(1)(v) treats the inland transportation of cargo 
by a related or unrelated corporation as incidental. Commentators 
suggested that inland transportation of cargo by the foreign 
corporation itself (after the cargo has passed through Customs) also 
should be treated as incidental. The final regulations do not adopt 
this suggestion. The IRS and Treasury are concerned that an exemption 
would permit foreign corporations engaged in international 
transportation to compete unfairly with other corporations engaged in 
the inland transportation of cargo.
    Under the proposed regulations, inland transportation by another 
corporation must be documented by a through bill of lading, airway 
bill, or similar document. Commentators asked whether the term similar 
document can include any document showing an inland leg to 
international transportation, such as a seaway bill or cargo receipt. 
The IRS and Treasury believe that similar document may be construed 
broadly to include any appropriate document.
    Commentators stated that some unincorporated entities provide 
inland transportation, and asked that such entities be included in the 
regulations. Accordingly, the final regulations have been revised to 
permit any unrelated person (whether incorporated or not) to provide 
inland transportation of cargo. The final regulations also provide that 
the rules of section 267(b) shall apply for purposes of determining 
whether persons are related.
Inland Transportation of Passengers
    Section 1.883-1(g)(1)(vi) treats the sale or issuance by a foreign 
corporation of interline or code-sharing tickets for the inland 
transportation of passengers by air as an incidental activity. 
Commentators suggested that the inland segment of an international 
journey also should be treated as incidental when provided by the 
foreign airline itself through the sale or issuance of an intraline 
ticket. The final regulations extend incidental treatment to the sale 
or issuance of intraline tickets. The final regulations also impose a 
maximum 12-hour scheduled interval between the international and inland 
segments of any flight involving intraline tickets.
Shore Excursions
    Land tour packages are excluded from incidental activities under 
Sec.  1.883-1(g)(2)(i). Commentators contend that single-day shore 
excursions are not the same as land tour packages and should qualify as 
an incidental activity. The final regulations do not adopt this 
suggestion because the two activities are similar in nature.
Short-term Use
    Ships normally engaged in international cruises may occasionally be 
used for other purposes, such as cruises to nowhere. Commentators asked 
that such short-term use be treated as an incidental activity. The 
final regulations do not adopt this suggestion because domestic use of 
a vessel does not qualify as the international operation of ships or 
aircraft.
Airline Tickets
    Section 1.883-1(g)(1) treats as incidental the sale of tickets by 
an airline for international transportation on another airline, and the 
sale of tickets by a ship operator on behalf of another ship operator. 
Section 1.883-1(g)(2)(iii), however, excludes from incidental income 
the sale of airline tickets by a cruise company. Commentators objected 
to this exclusion. This exclusion is retained in the final regulations. 
Cruise companies that sell airline tickets are acting in a capacity 
comparable to travel agents, and would have an unfair competitive 
advantage if their income from this activity were exempt.
Ground Services and Other Services
    The proposed regulations, in Sec.  1.883-1(g)(3), reserve on the 
treatment of ground services, maintenance and catering, as well as 
other services not mentioned as included among incidental activities. 
In the absence of a

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clear international norm or standard regarding the appropriate 
treatment of such services, the IRS and Treasury solicited comments on 
an appropriate rule. Commentators generally suggested that activities 
be treated as incidental unless they rise to the level of a separate, 
nonshipping business. The final regulations continue to reserve on this 
issue, pending further consideration by the IRS and Treasury.
I. Determining Equivalent Exemptions for Each Category of Income
    Section 1.883-1(h)(2) of the proposed regulations provides that if 
an exemption is unavailable in a foreign country for one of the eight 
enumerated categories of income, the foreign country is not considered 
to grant an equivalent exemption with respect to that category of 
income. Paragraph (h)(2)(vi) of this section treats incidental income, 
other than incidental bareboat charter or dry lease income and 
incidental container-related income, as one category of income.
    Commentators suggested that an equivalent exemption be determined 
on an item-of-income basis rather than by category of income. 
Commentators objected to the requirement that a foreign country exempt 
all items of income within a category of income to be treated as 
granting an equivalent exemption. The examples provided by commentators 
indicated that this concern arose primarily in the context of the 
residual category of incidental income described in paragraph 
(h)(2)(vi).
    The final regulations retain the requirement that a foreign country 
exempt all items of income within a category of income, but provide an 
exception for incidental income described in paragraph (h)(2)(vi). The 
final regulations permit an exemption of any type of incidental income 
that qualifies under paragraph (g)(1) if a foreign country grants an 
equivalent exemption with respect to that type of income. For example, 
if a foreign country grants an equivalent exemption for the sale of 
airline tickets on behalf of another corporation engaged in 
international operation of aircraft, as provided in paragraph 
(g)(1)(iii), but does not provide an equivalent exemption for the 
inland transportation of cargo, as provided in paragraph (g)(1)(v), the 
foreign country is nonetheless considered to grant an equivalent 
exemption for the sale of airline tickets.
    Commentators also pointed out that some income items may be 
described in more than one category of income, and asked which category 
would apply for purposes of determining whether the foreign country 
provides an equivalent exemption. The IRS and Treasury believe that the 
taxpayer can select any applicable category of income that provides an 
exemption.
J. Special Rules With Respect to Income Tax Conventions
    Section 1.883-1(h)(3)(i) of the proposed regulations provides that 
if a taxpayer is eligible to exempt income under both an applicable 
income tax convention and section 883, the taxpayer may claim an 
exemption under both the applicable income tax convention and section 
883 with respect to such category of income. Such an election must be 
made with respect to all income of the foreign corporation from the 
international operation of ships or aircraft, and cannot be made 
separately with respect to different categories of income.
    Commentators requested clarification concerning the election to 
claim an exemption under both the applicable income tax convention and 
section 883 when the benefits under the two exemptions are not co-
extensive with respect to any category of income.
    The final regulations have been clarified to provide that if a 
corporation chooses to claim an exemption under an income tax 
convention, it may simultaneously claim an exemption under section 883 
with respect to any category of income listed in paragraphs (h)(2)(i) 
through (v), (vii), and (viii) of Sec.  1.883-1 and to any type of 
income described in paragraph (h)(2)(vi) of Sec.  1.883-1, but only to 
the extent that such income also is exempt under the income tax 
convention.
K. Participation in Certain Joint Ventures
    Under Sec.  1.883-1(h)(3)(i), a corporation organized in a foreign 
country that provides an exemption only through an income tax 
convention is not permitted to claim an exemption under section 883, 
with one exception. Paragraph (h)(3)(ii) permits such corporation to 
claim an exemption under section 883 if the foreign corporation 
participates in a joint venture described in paragraph (e)(2) that is 
not treated as fiscally transparent with respect to the category of 
income derived from the joint venture under the income tax laws of the 
jurisdiction where the foreign corporation is organized, and treaty 
benefits would be available but for this reason.
    Commentators suggested that the exception in Sec.  1.883-
1(h)(3)(ii) should apply to single-owner disregarded entities in 
addition to transparent joint ventures. This suggestion was not 
adopted. The IRS and Treasury believe that the policy justification for 
relief in the joint venture context is not present in the context of a 
wholly owned entity.
L. Independent Interpretation of Income Tax Conventions
    Section 1.883-1(h)(3)(iii) of the proposed regulations clarifies 
that definitions provided in these regulations do not give meaning or 
provide guidance regarding similar terms in U.S. income tax conventions 
or the scope of any treaty exemption. Commentators stated that 
definitions in the regulations and income tax conventions should have 
the same scope and be interpreted in the same way. The IRS and Treasury 
continue to believe that terms used in the proposed regulations should 
not be used to interpret terms and concepts in U.S. income tax 
conventions except to the extent that a treaty that entered into force 
after August 26, 2003 or its legislative history explicitly refers to 
section 883 and guidance thereunder for its meaning.

Comments Relating to Sec.  1.883-2: Treatment of Publicly-traded 
Corporations

A. Closely-held Classes of Stock not Treated as Meeting Trading 
Requirements
    Section 1.883-2(d)(3)(i) of the proposed regulations disqualifies a 
class of stock from being relied on to satisfy the publicly traded test 
if, at any time during the taxable year, one or more 5-percent 
shareholders of that class of stock (determined without regard to the 
attribution rules in Sec.  1.883-4) owns, in the aggregate, 50 percent 
or more of the total vote and value of that class of stock (closely-
held rule).
    Commentators pointed out that a company could lose its exemption if 
a nonqualified shareholder held a sufficiently large block of stock for 
one day. Commentators suggested requiring a longer period of ownership 
by nonqualified shareholders before disqualifying a class of stock from 
being relied on to satisfy the publicly traded test.
    This suggestion has been adopted. The final regulations provide 
that a class of stock will be disqualified if one or more 5-percent 
shareholders of that class of stock owns, in the aggregate, 50 percent 
or more of the total vote and value of that class of stock for more 
than half the number of days during the corporation's taxable year. In 
this way, the closely-held rule matches the exception provided in Sec.  
1.883-2(d)(3)(ii)

[[Page 51398]]

which permits a foreign corporation to establish that qualified 
shareholders own sufficient shares in the closely-held block of stock 
to preclude nonqualified shareholders from owning 50 percent or more of 
the total value of the class of stock for more than half the number of 
days during the taxable year.
    To demonstrate that a class of stock is not closely-held for 
purposes of Sec.  1.883-2(d)(3)(i), a foreign corporation whose stock 
is traded on an established securities market in the United States may 
rely on current Schedule 13G filings with the Securities and Exchange 
Commission to identify its 5-percent shareholders in each class of 
stock relied upon to meet the regularly traded test, without having to 
make any independent investigation to determine the identity of the 5-
percent shareholders. Sec.  1.883-4(d)(3)(viii). Commentators suggested 
that a foreign corporation also be permitted to rely on current 
Schedule 13D filings with the Securities and Exchange Commission to 
identify 5-percent shareholders for purposes of meeting the exception 
contained in Sec.  1.883-2(d)(3)(ii). The final regulations adopt this 
suggestion.
    Under Sec.  1.883-2(d)(3)(iii)(B) of the proposed regulations, an 
investment company registered under the Investment Company Act of 1940 
will not be treated as a 5-percent shareholder if no person owns both 5 
percent or more of the value of the outstanding interests in the 
investment company and 5 percent or more of the value of the shares of 
the class of stock of the foreign corporation. Commentators suggested 
that this exception be extended to foreign mutual funds, other 
investment companies not registered under the Investment Company Act of 
1940, and financial institutions with customer or nominee accounts. 
Commentators also pointed out that it would be difficult for a shipping 
company to determine the identity of 5-percent owners of a mutual fund 
because most mutual fund shares are held in street name.
    The final regulations eliminate the provision that treats an 
investment company registered under the Investment Company Act of 1940 
as a 5-percent shareholder if a person owns both 5 percent or more of 
the value of the outstanding interests in the investment company and 5 
percent or more of the value of the shares of the class of stock of the 
foreign corporation. Instead, the final regulations provide that such 
an investment company shall not be treated as a 5-percent shareholder 
for purposes of these regulations. The final regulations do not expand 
the mutual fund exception to include other types of investment vehicles 
or financial institutions.

Comments Relating to Sec.  1.883-3: Treatment of Controlled Foreign 
Corporations

Income Inclusion Test
    Section 883(c)(2) provides that the stock ownership test of section 
883(c)(1) shall not apply to controlled foreign corporations (CFCs). 
Under the proposed regulations, a CFC is considered to satisfy the CFC 
exception of section 883(c)(1) if it meets the requirements of Sec.  
1.883-3. One such requirement is the income inclusion test of Sec.  
1.883-3(b). This test requires that more than 50 percent of the subpart 
F income derived by the CFC from the international operation of ships 
or aircraft be includible in the gross income of one or more U.S. 
citizens, individual residents of the United States, or domestic 
corporations.
    Commentators restated their objection to the income inclusion test. 
They argued that the test is too restrictive because it could deny 
qualified foreign corporation status to CFCs legitimately owned and 
controlled by U.S. shareholders.
    The IRS and Treasury continue to believe that the income inclusion 
rule contained in the proposed regulations is supported by the 
legislative history to section 883(c). The Conference report 
accompanying the legislation that added the CFC exception provides with 
respect to the exception that ``corporations are not considered 
residents of countries that exempt U.S. persons unless 50 percent or 
more of the ultimate individual owners are U.S. shareholders of 
controlled foreign corporations''. H.R. Conf. Rep. No. 99-841, 99th 
Cong., 2d Sess. 598 (1986), reprinted in 1986-3 C.B. vol. 4, at 598 
(1986). The intent of the CFC exception, therefore, is for the general 
ownership requirement of section 883(c)(1) to apply unless the foreign 
corporation is a CFC and 50 percent or more of the subpart F income of 
that corporation derived from the international operation of ships or 
aircraft is includible by U.S. citizens, individual residents, or 
domestic corporations.
    Commentators stated that if the income inclusion test is retained, 
the regulations should provide that income derived by U.S. tax-exempt 
organizations holding shares in CFCs should be counted toward 
satisfying the income inclusion test even though the income is not 
taxed.
    The final regulations do not adopt this suggestion. A U.S. tax-
exempt organization is not in substance different from a U.S. person 
that is not required to include in its gross income the subpart F 
income of a CFC.

Comments Relating to Sec.  1.883-4: Qualified Shareholder Stock 
Ownership Test

A. Qualified Shareholders
    A foreign corporation satisfies the stock ownership test of Sec.  
1.883-1(c)(2) if more than 50 percent of the value of its outstanding 
shares is owned, or treated as owned through attribution, for at least 
half of the number of days in the foreign corporation's taxable year by 
one or more qualified shareholders. Section 1.883-4(b)(1)(i)(A) of the 
proposed regulations treats an individual resident in a qualified 
foreign country as a qualified shareholder, but excludes individuals 
described in Sec.  1.883-4(b)(1)(i)(E) and (F). Commentators stated 
that the exclusion of pension fund beneficiaries described in paragraph 
(b)(1)(i)(E) could be interpreted to prevent the qualification of an 
individual under paragraph (b)(1)(i)(A). For example, if an individual 
held stock directly in a shipping company and also was the beneficiary 
of a pension fund holding stock in the same company, commentators 
believe that the individual might not qualify under paragraph 
(b)(1)(i)(A) with respect to the individual's direct ownership. The 
final regulations clarify that an individual can be a qualified 
shareholder under paragraph (b)(1)(i)(A) and also be a qualified 
shareholder under paragraph (b)(1)(i)(E) with respect to a category of 
income for which a foreign corporation is seeking an exemption.
    Under Sec.  1.883-4(b)(1)(i)(D) of the proposed regulations, a not-
for-profit organization described in Sec.  1.883-4(b)(4) is treated as 
a qualified shareholder. Section 1.883-4(b)(4)(iii)(A) requires a not-
for-profit organization to expend more than 50 percent of its annual 
support on behalf of individuals described in Sec.  1.883-
4(b)(1)(i)(A).
    Commentators suggested that the category of recipients eligible for 
support be expanded to include other not-for-profit organizations. This 
suggestion has been adopted in part. The final regulations provide that 
a not-for-profit organization may be a qualified shareholder if it 
expends more than 50 percent of its annual support on behalf of U.S. 
organizations that have received determination letters under section 
501(c)(3) and on behalf of individuals described in Sec.  1.883-
4(b)(1)(i)(A).

[[Page 51399]]

    Commentators asked that the list of qualified shareholders in Sec.  
1.883-4(b)(1)(i) be expanded to include international organizations as 
defined in section 7701(a)(18), and pension funds established for 
employees of such organizations. The final regulations do not adopt 
this suggestion. Under section 883(c)(1) and Sec.  1.883-4(a), a 
foreign corporation satisfies the stock ownership test if more than 50 
percent of the value of its outstanding shares is owned by qualified 
shareholders who are residents of qualified foreign countries. The 
remaining shares of the foreign corporation can be owned by 
nonqualified shareholders, including international organizations.
    Section 1.883-4(b)(1)(ii) of the proposed regulations provides that 
a shareholder is a qualified shareholder only if the shareholder does 
not own its interest in the foreign corporation through bearer shares, 
either directly or by applying the attribution rules of Sec.  1.883-
4(c). Commentators renewed their objection to this rule. The final 
regulations retain this provision due to the difficulty of reliably 
demonstrating the true ownership of bearer shares.
B. Substantiation of Stock Ownership
    Section 1.883-4(b)(1)(iii) of the proposed regulations provides 
that a shareholder is a qualified shareholder only if the shareholder 
provides to the foreign corporation the documentation required in Sec.  
1.883-4(d), and the foreign corporation meets the reporting 
requirements of Sec.  1.883-4(e) with respect to such shareholder. 
Commentators argued that the required reporting requirements are 
burdensome, and suggested that taxpayers have the option of submitting 
a sworn statement with their return stating that qualified individuals 
own the corporation and that supporting documentation has been 
deposited with a qualified tax practitioner in the United States. The 
final regulations do not adopt this suggestion. The IRS and Treasury 
continue to believe that this information is necessary for proper 
administration of section 883 and that the provision of this 
information with the foreign corporation's tax return is not unduly 
burdensome.

Special Analyses

    It has been determined that this Treasury decision is not a 
significant regulatory action as defined in Executive Order 12866. 
Therefore, a regulatory assessment is not required. It is hereby 
certified that the collection of information in these regulations will 
not have a significant economic impact on a substantial number of U.S. 
small entities. This certification is based upon the fact that these 
regulations apply to foreign corporations and impose only a limited 
collection of information burden on shareholders of such corporations, 
which in some cases may include U.S. small entities. Therefore, a 
Regulatory Flexibility Analysis under the Regulatory Flexibility Act (5 
U.S.C. chapter 6) is not required. Pursuant to section 7805(f) of the 
Internal Revenue Code, the notice of proposed rulemaking preceding 
these regulations was submitted to the Chief Counsel for Advocacy of 
the Small Business Administration for comment on its impact on small 
business.

Drafting Information

    The principal author of these final regulations is David L. Lundy 
of the Office of Associate Chief Counsel (International). However, 
other personnel from the IRS and Treasury Department participated in 
their development.

List of Subjects

26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

26 CFR Part 602

    Reporting and recordkeeping requirements.

Adoption of Amendments to the Regulations

0
Accordingly, 26 CFR parts 1 and 602 are amended as follows:

PART 1--INCOME TAXES

0
Paragraph 1. The authority citation for part 1 is amended by adding 
entries in numerical order to read as follows:

    Authority: 26 U.S.C. 7805 * * *
    Section 1.883-1 is also issued under 26 U.S.C. 883.
    Section 1.883-2 is also issued under 26 U.S.C. 883.
    Section 1.883-3 is also issued under 26 U.S.C. 883.
    Section 1.883-4 is also issued under 26 U.S.C. 883.
    Section 1.883-5 is also issued under 26 U.S.C. 883. * * *


0
Par. 2. Section 1.883-0 is added to read as follows:


Sec.  1.883-0  Outline of major topics.

    This section lists the major paragraphs contained in Sec. Sec.  
1.883-1 through 1.883-5.


Sec.  1.883-1  Exclusion of income from the international operation of 
ships or aircraft.

    (a) General rule.
    (b) Qualified income.
    (c) Qualified foreign corporation.
    (1) General rule.
    (2) Stock ownership test.
    (3) Substantiation and reporting requirements.
    (i) General rule.
    (ii) Further documentation.
    (4) Commissioner's discretion to cure defects in documentation.
    (d) Qualified foreign country.
    (e) Operation of ships or aircraft.
    (1) General rule.
    (2) Pool, partnership, strategic alliance, joint operating 
agreement, code-sharing arrangement or other joint venture.
    (3) Activities not considered operation of ships or aircraft.
    (4) Examples.
    (5) Definitions.
    (i) Bareboat charter.
    (ii) Code-sharing arrangement.
    (iii) Dry lease.
    (iv) Entity.
    (v) Fiscally transparent entity under the income tax laws of the 
United States.
    (vi) Full charter.
    (vii) Nonvessel operating common carrier.
    (viii) Space or slot charter.
    (ix) Time charter.
    (x) Voyage charter.
    (xi) Wet lease.
    (f) International operation of ships or aircraft.
    (1) General rule.
    (2) Determining whether income is derived from international 
operation of ships or aircraft.
    (i) International carriage of passengers.
    (A) General rule.
    (B) Round trip travel on ships.
    (ii) International carriage of cargo.
    (iii) Bareboat charter of ships or dry lease of aircraft used in 
international operation of ships or aircraft.
    (iv) Charter of ships or aircraft for hire.
    (g) Activities incidental to the international operation of 
ships or aircraft.
    (1) General rule.
    (2) Activities not considered incidental to the international 
operation of ships or aircraft.
    (3) Services.
    (i) Ground services, maintenance, and catering.
    (ii) Other services.
    (4) Activities involved in a pool, partnership, strategic 
alliance, joint operating agreement, code-sharing arrangement or 
other joint venture.
    (h) Equivalent exemption.
    (1) General rule.
    (2) Determining equivalent exemptions for each category of 
income.
    (3) Special rules with respect to income tax conventions.
    (i) General rule.
    (ii) Participation in certain joint ventures.
    (iii) Independent interpretation of income tax conventions.
    (4) Exemptions not qualifying as equivalent exemptions.
    (i) General rule.
    (ii) Reduced tax rate or time limited exemption.
    (iii) Inbound or outbound freight tax.
    (iv) Exemptions for limited types of cargo.

[[Page 51400]]

    (v) Territorial tax systems.
    (vi) Countries that tax on a residence basis.
    (vii) Exemptions within categories of income.
    (i) Treatment of possessions.
    (j) Expenses related to qualified income.


Sec.  1.883-2  Treatment of publicly-traded corporations.

    (a) General rule.
    (b) Established securities market.
    (1) General rule.
    (2) Exchanges with multiple tiers.
    (3) Computation of dollar value of stock traded.
    (4) Over-the-counter market.
    (5) Discretion to determine that an exchange does not qualify as 
an established securities market.
    (c) Primarily traded.
    (d) Regularly traded.
    (1) General rule.
    (2) Classes of stock traded on a domestic established securities 
market treated as meeting trading requirements.
    (3) Closely-held classes of stock not treated as meeting trading 
requirements.
    (i) General rule.
    (ii) Exception.
    (iii) Five-percent shareholders.
    (A) Related persons.
    (B) Investment companies.
    (4) Anti-abuse rule.
    (5) Example.
    (e) Substantiation that a foreign corporation is publicly 
traded.
    (1) General rule.
    (2) Availability and retention of documents for inspection.
    (f) Reporting requirements.


Sec.  1.883-3  Treatment of controlled foreign corporations.

    (a) General rule.
    (b) Income inclusion test.
    (1) General rule.
    (2) Examples.
    (c) Substantiation of CFC stock ownership.
    (1) General rule.
    (2) Documentation from certain United States shareholders.
    (i) General rule.
    (ii) Availability and retention of documents for inspection.
    (d) Reporting requirements.


Sec.  1.883-4  Qualified shareholder stock ownership test.

    (a) General rule.
    (b) Qualified shareholder.
    (1) General rule.
    (2) Residence of individual shareholders.
    (i) General rule.
    (ii) Tax home.
    (3) Certain income tax convention restrictions applied to 
shareholders.
    (4) Not-for-profit organizations.
    (5) Pension funds.
    (i) Pension fund defined.
    (ii) Government pension funds.
    (iii) Nongovernment pension funds.
    (iv) Beneficiary of a pension fund.
    (c) Rules for determining constructive ownership.
    (1) General rules for attribution.
    (2) Partnerships.
    (i) General rule.
    (ii) Partners resident in the same country.
    (iii) Examples.
    (3) Trusts and estates.
    (i) Beneficiaries.
    (ii) Grantor trusts.
    (4) Corporations that issue stock.
    (5) Taxable nonstock corporations.
    (6) Mutual insurance companies and similar entities.
    (7) Computation of beneficial interests in nongovernment pension 
funds.
    (d) Substantiation of stock ownership.
    (1) General rule.
    (2) Application of general rule.
    (i) Ownership statements.
    (ii) Three-year period of validity.
    (3) Special rules.
    (i) Substantiating residence of certain shareholders.
    (ii) Special rule for registered shareholders owning less than 
one percent of widely-held corporations.
    (iii) Special rule for beneficiaries of pension funds.
    (A) Government pension fund.
    (B) Nongovernment pension fund.
    (iv) Special rule for stock owned by publicly-traded 
corporations.
    (v) Special rule for not-for-profit organizations.
    (vi) Special rule for a foreign airline covered by an air 
services agreement.
    (vii) Special rule for taxable nonstock corporations.
    (viii) Special rule for closely-held corporations traded in the 
United States.
    (4) Ownership statements from shareholders.
    (i) Ownership statements from individuals.
    (ii) Ownership statements from foreign governments.
    (iii) Ownership statements from publicly-traded corporate 
shareholders.
    (iv) Ownership statements from not-for-profit organizations.
    (v) Ownership statements from intermediaries.
    (A) General rule.
    (B) Ownership statements from widely-held intermediaries with 
registered shareholders owning less than one percent of such widely-
held intermediary.
    (C) Ownership statements from pension funds.
    (1) Ownership statements from government pension funds.
    (2) Ownership statements from nongovernment pension funds.
    (3) Time for making determinations.
    (D) Ownership statements from taxable nonstock corporations.
    (5) Availability and retention of documents for inspection.
    (e) Reporting requirements.


Sec.  1.883-5  Effective dates.

    (a) General rule.
    (b) Election for retroactive application.
    (c) Transitional information reporting rule.


0
Par. 3. Sec.  1.883-1 is revised to read as follows:


Sec.  1.883-1  Exclusion of income from the international operation of 
ships or aircraft.

    (a) General rule. Qualified income derived by a qualified foreign 
corporation from its international operation of ships or aircraft is 
excluded from gross income and exempt from United States Federal income 
tax. Paragraph (b) of this section defines the term qualified income. 
Paragraph (c) of this section defines the term qualified foreign 
corporation. Paragraph (f) of this section defines the term 
international operation of ships or aircraft.
    (b) Qualified income. Qualified income is income derived from the 
international operation of ships or aircraft that--
    (1) Is properly includible in any of the income categories 
described in paragraph (h)(2) of this section; and
    (2) Is the subject of an equivalent exemption, as defined in 
paragraph (h) of this section, granted by the qualified foreign 
country, as defined in paragraph (d) of this section, in which the 
foreign corporation seeking qualified foreign corporation status is 
organized.
    (c) Qualified foreign corporation--(1) General rule. A qualified 
foreign corporation is a corporation that is organized in a qualified 
foreign country and considered engaged in the international operation 
of ships or aircraft. The term corporation is defined in section 
7701(a)(3) and the regulations thereunder. Paragraph (d) of this 
section defines the term qualified foreign country. Paragraph (e) of 
this section defines the term operation of ships or aircraft, and 
paragraph (f) of this section defines the term international operation 
of ships or aircraft. To be a qualified foreign corporation, the 
corporation must satisfy the stock ownership test of paragraph (c)(2) 
of this section and satisfy the substantiation and reporting 
requirements described in paragraph (c)(3) of this section. A 
corporation may be a qualified foreign corporation with respect to one 
category of qualified income but not with respect to another such 
category. See paragraph (h)(2) of this section for a discussion of the 
categories of qualified income.
    (2) Stock ownership test. To be a qualified foreign corporation, a 
foreign corporation must satisfy the publicly-traded test of Sec.  
1.883-2(a), the CFC stock ownership test of Sec.  1.883-3(a), or the 
qualified shareholder stock ownership test of Sec.  1.883-4(a).
    (3) Substantiation and reporting requirements--(i) General rule. To 
be a qualified foreign corporation, a foreign corporation must include 
the following information in its Form 1120-F, ``U.S. Income Tax Return 
of a Foreign Corporation,'' in the manner prescribed

[[Page 51401]]

by such form and its accompanying instructions--
    (A) The corporation's name and address (including mailing code);
    (B) The corporation's U.S. taxpayer identification number;
    (C) The foreign country in which the corporation is organized;
    (D) The applicable authority for an equivalent exemption, for 
example, citation of a statute in the country where the corporation is 
organized, a diplomatic note between the United States and such 
country, (for further guidance, see Rev. Rul. 2001-48 (2001-2 C.B. 324) 
(see Sec.  601.601(d)(2) of this chapter)), or, in the case of a 
corporation described in paragraph (h)(3)(ii) of this section, an 
income tax convention between the United States and such country;
    (E) The category or categories of qualified income for which an 
exemption is being claimed;
    (F) A reasonable estimate of the gross amount of income in each 
category of qualified income for which the exemption is claimed, to the 
extent such amounts are readily determinable;
    (G) Any other information required under Sec.  1.883-2(f), 1.883-
3(d), or 1.883-4(e), as applicable; and
    (H) Any other relevant information specified by the Form 1120-F and 
its accompanying instructions.
    (ii) Further documentation. If the Commissioner requests in writing 
that the foreign corporation document or substantiate representations 
made under paragraph (c)(3)(i) of this section, or under Sec.  1.883-
2(f), 1.883-3(d) or 1.883-4(e), the foreign corporation must provide 
the documentation or substantiation within 60 days following the 
written request. If the foreign corporation does not provide the 
documentation and substantiation requested within the 60-day period, 
but demonstrates that the failure was due to reasonable cause and not 
willful neglect, the Commissioner may grant the foreign corporation a 
30-day extension to provide the documentation or substantiation. 
Whether a failure to obtain the documentation or substantiation in a 
timely manner was due to reasonable cause and not willful neglect shall 
be determined by the Commissioner after considering all the facts and 
circumstances.
    (4) Commissioner's discretion to cure defects in documentation. The 
Commissioner retains the discretion to cure any defects in the 
documentation where the Commissioner is satisfied that the foreign 
corporation would otherwise be a qualified foreign corporation.
    (d) Qualified foreign country. A qualified foreign country is a 
foreign country that grants to corporations organized in the United 
States an equivalent exemption, as described in paragraph (h) of this 
section, for the category of qualified income, as described in 
paragraph (h)(2) of this section, derived by the foreign corporation 
seeking qualified foreign corporation status. A foreign country may be 
a qualified foreign country with respect to one category of qualified 
income but not with respect to another such category.
    (e) Operation of ships or aircraft--(1) General rule. Except as 
provided in paragraph (e)(2) of this section, a foreign corporation is 
considered engaged in the operation of ships or aircraft only during 
the time it is an owner or lessee of one or more entire ships or 
aircraft and uses such ships or aircraft in one or more of the 
following activities--
    (i) Carriage of passengers or cargo for hire;
    (ii) In the case of a ship, the leasing out of the ship under a 
time or voyage charter (full charter), space or slot charter, or 
bareboat charter, as those terms are defined in paragraph (e)(5) of 
this section, provided the ship is used to carry passengers or cargo 
for hire; and
    (iii) In the case of aircraft, the leasing out of the aircraft 
under a wet lease (full charter), space, slot, or block-seat charter, 
or dry lease, as those terms are defined in paragraph (e)(5) of this 
section, provided the aircraft is used to carry passengers or cargo for 
hire.
    (2) Pool, partnership, strategic alliance, joint operating 
agreement, code-sharing arrangement or other joint venture. A foreign 
corporation is considered engaged in the operation of ships or aircraft 
within the meaning of paragraph (e)(1) of this section with respect to 
its participation in a pool, partnership, strategic alliance, joint 
operating agreement, code-sharing arrangement or other joint venture if 
it directly, or indirectly through one or more fiscally transparent 
entities under the income tax laws of the United States, as defined in 
paragraph (e)(5)(v) of this section--
    (i) Owns an interest in a partnership, disregarded entity, or other 
fiscally transparent entity under the income tax laws of the United 
States that itself would be considered engaged in the operation of 
ships or aircraft under paragraph (e)(1) of this section if it were a 
foreign corporation; or
    (ii) Participates in a pool, strategic alliance, joint operating 
agreement, code-sharing arrangement, or other joint venture that is not 
an entity, as defined in paragraph (e)(5)(iv) of this section, 
involving one or more activities described in paragraphs (e)(1)(i) 
through (iii) of this section, but only if--
    (A) In the case of a direct interest, the foreign corporation is 
otherwise engaged in the operation of ships or aircraft under paragraph 
(e)(1) of this section; or
    (B) In the case of an indirect interest, either the foreign 
corporation is otherwise engaged, or one of the fiscally transparent 
entities would be considered engaged if it were a foreign corporation, 
in the operation of ships or aircraft under paragraph (e)(1) of this 
section.
    (3) Activities not considered operation of ships or aircraft. 
Activities that do not constitute operation of ships or aircraft 
include, but are not limited to--
    (i) The activities of a nonvessel operating common carrier, as 
defined in paragraph (e)(5)(vii) of this section;
    (ii) Ship or aircraft management;
    (iii) Obtaining crews for ships or aircraft operated by another 
party;
    (iv) Acting as a ship's agent;
    (v) Ship or aircraft brokering;
    (vi) Freight forwarding;
    (vii) The activities of travel agents and tour operators;
    (viii) Rental by a container leasing company of containers and 
related equipment; and
    (ix) The activities of a concessionaire.
    (4) Examples. The rules of paragraphs (e)(1) through (3) of this 
section are illustrated by the following examples:

    Example 1. Three tiers of charters--(i) Facts. A, B, and C are 
foreign corporations. A purchases a ship. A and B enter into a 
bareboat charter of the ship for a term of 20 years, and B, in turn, 
enters into a time charter of the ship with C for a term of 5 years. 
Under the time charter, B is responsible for the complete operation 
of the ship, including providing the crew and maintenance. C uses 
the ship during the term of the time charter to carry its customers' 
freight between U.S. and foreign ports. C owns no ships.
    (ii) Analysis. Because A is the owner of the entire ship and 
leases out the ship under a bareboat charter to B, and because the 
sublessor, C, uses the ship to carry cargo for hire, A is considered 
engaged in the operation of a ship under paragraph (e)(1) of this 
section during the term of the time charter. B leases in the entire 
ship from A and leases out the ship under a time charter to C, who 
uses the ship to carry cargo for hire. Therefore, B is considered 
engaged in the operation of a ship under paragraph (e)(1) of this 
section during the term of the time charter. C time charters the 
entire ship from B and uses the ship to carry its customers' freight 
during the term of the charter. Therefore, C is also engaged in the 
operation of a ship under paragraph (e)(1) of this section during 
the term of the time charter.
    Example 2. Partnership with contributed shipping assets--(i) 
Facts. X, Y, and Z, each a foreign corporation, enter into a 
partnership, P. P is a fiscally transparent

[[Page 51402]]

entity under the income tax laws of the United States, as defined in 
paragraph (e)(5)(v) of this section. Under the terms of the 
partnership agreement, each partner contributes all of the ships in 
its fleet to P in exchange for interests in the partnership and 
shares in the P profits from the international carriage of cargo. 
The partners share in the overall management of P, but each partner, 
acting in its capacity as partner, continues to crew and manage all 
ships previously in its fleet.
    (ii) Analysis. P owns the ships contributed by the partners and 
uses these ships to carry cargo for hire. Therefore, if P were a 
foreign corporation, it would be considered engaged in the operation 
of ships within the meaning of paragraph (e)(1) of this section. 
Accordingly, because P is a fiscally transparent entity under the 
income tax laws of the United States, as defined in paragraph 
(e)(5)(v) of this section, X, Y, and Z are each considered engaged 
in the operation of ships through P, within the meaning of paragraph 
(e)(2)(i) of this section, with respect to their distributive share 
of income from P's international carriage of cargo.
    Example 3. Joint venture with chartered in ships--(i) Facts. 
Foreign corporation A owns a number of foreign subsidiaries involved 
in various aspects of the shipping business, including S1, S2, S3, 
and S4. S4 is a foreign corporation that provides cruises but does 
not own any ships. S1, S2, and S3 are foreign corporations that own 
cruise ships. S1, S2, S3, and S4 form joint venture JV, in which 
they are all interest holders, to conduct cruises. JV is a fiscally 
transparent entity under the income tax laws of the United States, 
as defined in paragraph (e)(5)(v) of this section. Under the terms 
of the joint venture, S1, S2, and S3 each enter into time charter 
agreements with JV, pursuant to which S1, S2, and S3 retain control 
of the navigation and management of the individual ships, and JV 
will use the ships to carry passengers for hire. The overall 
management of the cruise line will be provided by S4.
    (ii) Analysis. S1, S2, and S3 each owns ships and time charters 
those ships to JV, which uses the ships to carry passengers for 
hire. Accordingly, S1, S2, and S3 are each considered engaged in the 
operation of ships under paragraph (e)(1) of this section. JV leases 
in entire ships by means of the time charters, and JV uses those 
ships to carry passengers on cruises. Thus, JV would be engaged in 
the operation of ships within the meaning of paragraph (e)(1) of 
this section if it were a foreign corporation. Therefore, although 
S4 does not directly own or lease in a ship, S4 also is engaged in 
the operation of ships, within the meaning of paragraph (e)(2)(i) of 
this section, with respect to its participation in JV.
    Example 4. Tiered partnerships--(i) Facts. Foreign corporations 
A, B, and C enter into a partnership, P1. P1 is one of several 
shareholders of Poolco, a foreign limited liability company that 
makes an election pursuant to Sec.  301.7701-3 of this chapter to be 
treated as a partnership for U.S. tax purposes. P1 acquires several 
ships and time charters them out to Poolco. Poolco slot or voyage 
charters such ships out to third parties for use in the carriage of 
cargo for hire. P1 and Poolco are fiscally transparent entities 
under the income tax laws of the United States, as defined in 
paragraph (e)(5)(v) of this section.
    (ii) Analysis. A, B, and C are considered engaged in the 
operation of ships under paragraph (e)(2)(i) of this section with 
respect to their direct interest in P1 and with respect to their 
indirect interest in Poolco because both P1 and Poolco are fiscally 
transparent entities under the income tax laws of the United States 
and would be considered engaged in the operation of ships under 
paragraph (e)(1) of this section if they were foreign corporations. 
The result would be the same if Poolco were a single-member 
disregarded entity owned solely by P1.

    (5) Definitions--(i) Bareboat charter. A bareboat charter is a 
contract for the use of a ship or aircraft whereby the lessee is in 
complete possession, control, and command of the ship or aircraft. For 
example, in a bareboat charter, the lessee is responsible for the 
navigation and management of the ship or aircraft, the crew, supplies, 
repairs and maintenance, fees, insurance, charges, commissions and 
other expenses connected with the use of the ship or aircraft. The 
lessor of the ship bears none of the expense or responsibility of 
operation of the ship or aircraft.
    (ii) Code-sharing arrangement. A code-sharing arrangement is an 
arrangement in which one air carrier puts its identification code on 
the flight of another carrier. This arrangement allows the first 
carrier to hold itself out as providing service in markets where it 
does not otherwise operate or where it operates infrequently. Code-
sharing arrangements can range from a very limited agreement between 
two carriers involving only one market to agreements involving multiple 
markets and alliances between or among international carriers which 
also include joint marketing, baggage handling, one-stop check-in 
service, sharing of frequent flyer awards, and other services. For 
rules involving the sale of code-sharing tickets, see paragraph 
(g)(1)(vi) of this section.
    (iii) Dry lease. A dry lease is the bareboat charter of an 
aircraft.
    (iv) Entity. For purposes of this paragraph (e), an entity is any 
person that is treated by the United States as other than an individual 
for U.S. Federal income tax purposes. The term includes disregarded 
entities.
    (v) Fiscally transparent entity under the income tax laws of the 
United States. For purposes of this paragraph (e), an entity is 
fiscally transparent under the income tax laws of the United States if 
the entity would be considered fiscally transparent under the income 
tax laws of the United States under the principles of Sec.  1.894-
1(d)(3).
    (vi) Full charter. Full charter (or full rental) means a time 
charter or a voyage charter of a ship or a wet lease of an aircraft but 
during which the full crew and management are provided by the lessor.
    (vii) Nonvessel operating common carrier. A nonvessel operating 
common carrier is an entity that does not exercise control over any 
part of a vessel, but holds itself out to the public as providing 
transportation for hire, issues bills of lading, assumes responsibility 
or is liable by law as a common carrier for safe transportation of 
shipments, and arranges in its own name with other common carriers, 
including those engaged in the operation of ships, for the performance 
of such transportation.
    (viii) Space or slot charter. A space or slot charter is a contract 
for use of a certain amount of space (but less than all of the space) 
on a ship or aircraft, and may be on a time or voyage basis. When used 
in connection with passenger aircraft this sort of charter may be 
referred to as the sale of block seats.
    (ix) Time charter. A time charter is a contract for the use of a 
ship or aircraft for a specific period of time, during which the lessor 
of the ship or aircraft retains control of the navigation and 
management of the ship or aircraft (i.e., the lessor continues to be 
responsible for the crew, supplies, repairs and maintenance, fees and 
insurance, charges, commissions and other expenses connected with the 
use of the ship or aircraft).
    (x) Voyage charter. A voyage charter is a contract similar to a 
time charter except that the ship or aircraft is chartered for a 
specific voyage or flight rather than for a specific period of time.
    (xi) Wet lease. A wet lease is the time or voyage charter of an 
aircraft.
    (f) International operation of ships or aircraft--(1) General rule. 
The term international operation of ships or aircraft means the 
operation of ships or aircraft, as defined in paragraph (e) of this 
section, with respect to the carriage of passengers or cargo on voyages 
or flights that begin or end in the United States, as determined under 
paragraph (f)(2) of this section. The term does not include the 
carriage of passengers or cargo on a voyage or flight that begins and 
ends in the United States, even if the voyage or flight contains a 
segment extending beyond the territorial limits of the United States, 
unless the passenger disembarks or the cargo is unloaded outside the 
United States. Operation of ships or aircraft beyond the territorial 
limits of the United States does not constitute in itself

[[Page 51403]]

international operation of ships or aircraft.
    (2) Determining whether income is derived from international 
operation of ships or aircraft. Whether income is derived from 
international operation of ships or aircraft is determined on a 
passenger by passenger basis (as provided in paragraph (f)(2)(i) of 
this section) and on an item-of-cargo by item-of-cargo basis (as 
provided in paragraph (f)(2)(ii) of this section). In the case of the 
bareboat charter of a ship or the dry lease of an aircraft, whether the 
charter income for a particular period is derived from international 
operation of ships or aircraft is determined by reference to how the 
ship or aircraft is used by the lowest-tier lessee in the chain of 
lessees (as provided in paragraph (f)(2)(iii) of this section).
    (i) International carriage of passengers--(A) General rule. Except 
in the case of a round trip described in paragraph (f)(2)(i)(B) of this 
section, income derived from the carriage of a passenger will be income 
from international operation of ships or aircraft if the passenger is 
carried between a beginning point in the United States and an ending 
point outside the United States, or vice versa. Carriage of a passenger 
will be treated as ending at the passenger's final destination even if, 
en route to the passenger's final destination, a stop is made at an 
intermediate point for refueling, maintenance, or other business 
reasons, provided the passenger does not change ships or aircraft at 
the intermediate point. Similarly, carriage of a passenger will be 
treated as beginning at the passenger's point of origin even if, en 
route to the passenger's final destination, a stop is made at an 
intermediate point, provided the passenger does not change ships or 
aircraft at the intermediate point. Carriage of a passenger will be 
treated as beginning or ending at a U.S. or foreign intermediate point 
if the passenger changes ships or aircraft at that intermediate point. 
Income derived from the sale of a ticket for international carriage of 
a passenger will be treated as income derived from international 
operation of ships or aircraft even if the passenger does not begin or 
complete an international journey because of unanticipated 
circumstances.
    (B) Round trip travel on ships. In the case of income from the 
carriage of a passenger on a ship that begins its voyage in the United 
States, calls on one or more foreign intermediate ports, and returns to 
the same or another U.S. port, such income from carriage of a passenger 
on the entire voyage will be treated as income derived from 
international operation of ships or aircraft under paragraph 
(f)(2)(i)(A) of this section. This result obtains even if such carriage 
includes one or more intermediate stops at a U.S. port or ports and 
even if the passenger does not disembark at the foreign intermediate 
point.
    (ii) International carriage of cargo. Income from the carriage of 
cargo will be income derived from international operation of ships or 
aircraft if the cargo is carried between a beginning point in the 
United States and an ending point outside the United States, or vice 
versa. Carriage of cargo will be treated as ending at the final 
destination of the cargo even if, en route to that final destination, a 
stop is made at a U.S. intermediate point, provided the cargo is 
transported to its ultimate destination on the same ship or aircraft. 
If the cargo is transferred to another ship or aircraft, the carriage 
of the cargo may nevertheless be treated as ending at its final 
destination, if the same taxpayer transports the cargo to and from the 
U.S. intermediate point and the cargo does not pass through customs at 
the U.S. intermediate point. Similarly, carriage of cargo will be 
treated as beginning at the cargo's point of origin, even if en route 
to its final destination a stop is made at a U.S. intermediate point, 
provided the cargo is transported to its ultimate destination on the 
same ship or aircraft. If the cargo is transferred to another ship or 
aircraft at the U.S. intermediate point, the carriage of the cargo may 
nevertheless be treated as beginning at the point of origin, if the 
same taxpayer transports the cargo to and from the U.S. intermediate 
point and the cargo does not pass through customs at the U.S. 
intermediate point. Repackaging, recontainerization, or any other 
activity involving the unloading of the cargo at the U.S. intermediate 
point does not change these results, provided the same taxpayer 
transports the cargo to and from the U.S. intermediate point and the 
cargo does not pass through customs at the U.S. intermediate point. A 
lighter vessel that carries cargo to, or picks up cargo from, a vessel 
located beyond the territorial limits of the United States and 
correspondingly loads or unloads that cargo at a U.S. port, carries 
cargo between a point in the United States and a point outside the 
United States. However, a lighter vessel that carries cargo to, or 
picks up cargo from, a vessel located within the territorial limits of 
the United States, and correspondingly loads or unloads that cargo at a 
U.S. port, is not engaged in international operation of ships or 
aircraft. Income from the carriage of military cargo on a voyage that 
begins in the United States, stops at a foreign intermediate port or a 
military prepositioning location, and returns to the same or another 
U.S. port without unloading its cargo at the foreign intermediate 
point, will nevertheless be treated as derived from international 
operation of ships or aircraft.
    (iii) Bareboat charter of ships or dry lease of aircraft used in 
international operation of ships or aircraft. If a qualified foreign 
corporation bareboat charters a ship or dry leases an aircraft to a 
lessee, and the lowest tier lessee in the chain of ownership uses such 
ship or aircraft for the international carriage of passengers or cargo 
for hire, as described in paragraphs (f)(2)(i) and (ii) of this 
section, then the amount of charter income attributable to the period 
the ship or aircraft is used by the lowest tier lessee is income from 
international operation of ships or aircraft. The foreign corporation 
generally must determine the amount of the charter income that is 
attributable to such international operation of ships or aircraft by 
multiplying the amount of charter income by a fraction, the numerator 
of which is the total number of days of uninterrupted travel on voyages 
or flights of such ship or aircraft between the United States and the 
farthest point or points where cargo or passengers are loaded en route 
to, or discharged en route from, the United States during the smaller 
of the taxable year or the particular charter period, and the 
denominator of which is the total number of days in the smaller of the 
taxable year or the particular charter period. For this purpose, the 
number of days during which the ship or aircraft is not generating 
transportation income, within the meaning of section 863(c)(2), are not 
included in the numerator or denominator of the fraction. However, the 
foreign corporation may adopt an alternative method for determining the 
amount of the charter income that is attributable to the international 
operation of ships or aircraft if it can establish that the alternative 
method more accurately reflects the amount of such income.
    (iv) Charter of ships or aircraft for hire. For purposes of this 
section, if a foreign corporation time, voyage, or bareboat charters 
out a ship or aircraft, and the lowest-tier lessee uses the ship or 
aircraft to carry passengers or cargo on a fee basis, the ship or 
aircraft is considered used to carry passengers or cargo for hire, 
regardless of whether the ship or aircraft may be empty during a 
portion of the charter period due to a backhaul voyage or flight or for

[[Page 51404]]

purposes of repositioning. If a foreign corporation time, voyage, or 
bareboat charters out a ship or aircraft, and the lowest-tier lessee 
uses the ship or aircraft for the carriage of proprietary goods, 
including an empty backhaul voyage or flight or repositioning related 
to such carriage of proprietary goods, the ship or aircraft similarly 
will be treated as used to carry cargo for hire.
    (g) Activities incidental to the international operation of ships 
or aircraft--(1) General rule. Certain activities of a foreign 
corporation engaged in the international operation of ships or aircraft 
are so closely related to the international operation of ships or 
aircraft that they are considered incidental to such operation, and 
income derived by the foreign corporation from its performance of these 
incidental activities is deemed to be income derived from the 
international operation of ships or aircraft. Examples of such 
activities include--
    (i) Temporary investment of working capital funds to be used in the 
international operation of ships or aircraft by the foreign 
corporation;
    (ii) Sale of tickets by the foreign corporation engaged in the 
international operation of ships for the international carriage of 
passengers by ship on behalf of another corporation engaged in the 
international operation of ships;
    (iii) Sale of tickets by the foreign corporation engaged in the 
international operation of aircraft for the international carriage of 
passengers by air on behalf of another corporation engaged in the 
international operation of aircraft;
    (iv) Contracting with concessionaires for performance of services 
onboard during the international operation of the foreign corporation's 
ships or aircraft;
    (v) Providing (either by subcontracting or otherwise) for the 
carriage of cargo preceding or following the international carriage of 
cargo under a through bill of lading, airway bill or similar document 
through a related corporation or through an unrelated person (and the 
rules of section 267(b) shall apply for purposes of determining whether 
a corporation or other person is related to the foreign corporation);
    (vi) To the extent not described in paragraph (g)(1)(iii) of this 
section, the sale or issuance by the foreign corporation engaged in the 
international operation of aircraft of intraline, interline, or code-
sharing tickets for the carriage of persons by air between a U.S. 
gateway and another U.S. city preceding or following international 
carriage of passengers, provided that all such flight segments are 
provided pursuant to the passenger's original invoice, ticket or 
itinerary and in the case of intraline tickets are a part of 
uninterrupted international air transportation (within the meaning of 
section 4262(c)(3));
    (vii) Arranging for port city hotel accommodations within the 
United States for a passenger for the one night before or after the 
international carriage of that passenger by the foreign corporation 
engaged in the international operation of ships;
    (viii) Bareboat charter of ships or dry lease of aircraft normally 
used by the foreign corporation in international operation of ships or 
aircraft but currently not needed, if the ship or aircraft is used by 
the lessee for international carriage of cargo or passengers;
    (ix) Arranging by means of a space or slot charter for the carriage 
of cargo listed on a bill of lading or airway bill or similar document 
issued by the foreign corporation on the ship or aircraft of another 
corporation engaged in the international operation of ships or 
aircraft; and
    (x) The provision of containers or other related equipment by the 
foreign corporation in connection with the international carriage of 
cargo for use by its customers, including short-term use within the 
United States immediately preceding or following the international 
carriage of cargo (and for this purpose, a period of five days or less 
shall be presumed to be short-term).
    (2) Activities not considered incidental to the international 
operation of ships or aircraft. Examples of activities that are not 
considered incidental to the international operation of ships or 
aircraft include--
    (i) The sale of or arranging for train travel, bus transfers, 
single day shore excursions, or land tour packages;
    (ii) Arranging for hotel accommodations within the United States 
other than as provided in paragraph (g)(1)(vii) of this section;
    (iii) The sale of airline tickets or cruise tickets other than as 
provided in paragraph (g)(1)(ii), (iii), or (vi) of this section;
    (iv) The sale or rental of real property;
    (v) Treasury activities involving the investment of excess funds or 
funds awaiting repatriation, even if derived from the international 
operation of ships or aircraft;
    (vi) The carriage of passengers or cargo on ships or aircraft on 
domestic legs of transportation not treated as either international 
operation of ships or aircraft under paragraph (f) of this section or 
as an activity that is incidental to such operation under paragraph 
(g)(1) of this section;
    (vii) The carriage of cargo by bus, truck or rail by a foreign 
corporation between a U.S. inland point and a U.S. gateway port or 
airport preceding or following the international carriage of such cargo 
by the foreign corporation; and
    (viii) The provision of containers or other related equipment by 
the foreign corporation within the United States other than as provided 
in paragraph (g)(1)(x) of this section, including warehousing.
    (3) Services--(i) Ground services, maintenance and catering. 
[Reserved]
    (ii) Other services. [Reserved]
    (4) Activities involved in a pool, partnership, strategic alliance, 
joint operating agreement, code-sharing arrangement or other joint 
venture. Notwithstanding paragraph (g)(1) of this section, an activity 
is considered incidental to the international operation of ships or 
aircraft by a foreign corporation, and income derived by the foreign 
corporation with respect to such activity is deemed to be income 
derived from the international operation of ships or aircraft, if the 
activity is performed by or pursuant to a pool, partnership, strategic 
alliance, joint operating agreement, code-sharing arrangement or other 
joint venture in which such foreign corporation participates directly, 
or indirectly through a fiscally transparent entity under the income 
tax laws of the United States, provided that--
    (i) Such activity is incidental to the international operation of 
ships or aircraft by the pool, partnership, strategic alliance, joint 
operating agreement, code-sharing arrangement or other joint venture, 
and provided that it is described in paragraph (e)(2)(i) of this 
section; or
    (ii) Such activity would be incidental to the international 
operation of ships or aircraft by the foreign corporation, or fiscally 
transparent entity if it performed such activity itself, and provided 
the foreign corporation is engaged or the fiscally transparent entity 
would be considered engaged if it were a foreign corporation in the 
operation of ships or aircraft under paragraph (e)(1) of this section.
    (h) Equivalent exemption--(1) General rule. A foreign country 
grants an equivalent exemption when it exempts from taxation income 
from the international operation of ships or aircraft derived by 
corporations organized in the United States. Whether a foreign country 
provides an equivalent exemption must be determined separately with 
respect to each category of income, as provided in paragraph (h)(2) of 
this section. An equivalent

[[Page 51405]]

exemption may be available for income derived from the international 
operation of ships even though income derived from the international 
operation of aircraft may not be exempt, and vice versa. For rules 
regarding foreign corporations organized in countries that provide 
exemptions only through an income tax convention, see paragraph (h)(3) 
of this section. An equivalent exemption may exist where the foreign 
country--
    (i) Generally imposes no tax on income, including income from the 
international operation of ships or aircraft;
    (ii) Specifically provides a domestic law tax exemption for income 
derived from the international operation of ships or aircraft, either 
by statute, decree, or otherwise; or
    (iii) Exchanges diplomatic notes with the United States, or enters 
into an agreement with the United States, that provides for a 
reciprocal exemption for purposes of section 883.
    (2) Determining equivalent exemptions for each category of income. 
Whether a foreign country grants an equivalent exemption must be 
determined separately with respect to income from the international 
operation of ships and income from the international operation of 
aircraft for each category of income listed in paragraphs (h)(2)(i) 
through (v), (vii), and (viii) of this section. If an exemption is 
unavailable in the foreign country for a particular category of income, 
the foreign country is not considered to grant an equivalent exemption 
with respect to that category of income. Income in that category is not 
considered to be the subject of an equivalent exemption and, thus, is 
not eligible for exemption from income tax in the United States, even 
though the foreign country may grant an equivalent exemption for other 
categories of income. With respect to paragraph (h)(2)(vi) of this 
section, a foreign country may be considered to grant an equivalent 
exemption for one or more types of income described in paragraph (g)(1) 
of this section. The following categories of income derived from the 
international operation of ships or aircraft may be exempt from United 
States income tax if an equivalent exemption is available--
    (i) Income from the carriage of passengers and cargo;
    (ii) Time or voyage (full) charter income of a ship or wet lease 
income of an aircraft;
    (iii) Bareboat charter income of a ship or dry charter income of an 
aircraft;
    (iv) Incidental bareboat charter income or incidental dry lease 
income;
    (v) Incidental container-related income;
    (vi) Income incidental to the international operation of ships or 
aircraft other than incidental income described in paragraphs 
(h)(2)(iv) and (v) of this section;
    (vii) Capital gains derived by a qualified foreign corporation 
engaged in the international operation of ships or aircraft from the 
sale, exchange or other disposition of a ship, aircraft, container or 
related equipment or other moveable property used by that qualified 
foreign corporation in the international operation of ships or 
aircraft; and
    (viii) Income from participation in a pool, partnership, strategic 
alliance, joint operating agreement, code-sharing arrangement, 
international operating agency, or other joint venture described in 
paragraph (e)(2) of this section.
    (3) Special rules with respect to income tax conventions-- (i) 
General rule. Except as provided in paragraph (h)(3)(ii) of this 
section, if a corporation is organized in a foreign country that 
provides an exemption only through an income tax convention with the 
United States, the foreign corporation is not organized in a foreign 
country that grants an equivalent exemption. Rather, the foreign 
corporation must satisfy the terms of that convention to receive a 
benefit under the convention, and the foreign corporation may not claim 
an exemption under section 883. If the corporation is organized in a 
foreign country that offers an exemption under an income tax convention 
and also by some other means, such as by diplomatic note or domestic 
statutory law, the foreign corporation may choose annually whether to 
claim an exemption under section 883 based upon the equivalent 
exemption provided by such other means or under the income tax 
convention. However, if a corporation chooses to claim an exemption 
under an income tax convention under the preceding sentence, it may 
simultaneously claim an exemption under section 883 with respect to any 
category of income listed in paragraphs (h)(2)(i) through (v), (vii), 
and (viii) of this section and to any type of income described in 
paragraph (h)(2)(vi) of this section, but only to the extent that such 
income also is exempt under the income tax convention. Any such choice 
will apply with respect to all qualified income of the corporation from 
the international operation of ships or aircraft and cannot be made 
separately with respect to different categories of such income. If a 
foreign corporation bases its claim for an exemption on section 883, 
the foreign corporation must satisfy all of the requirements of this 
section to qualify for an exemption from U.S. income tax. See Sec.  
1.883-4(b)(3) for rules regarding satisfying the ownership test of 
paragraph (c)(2) of this section using shareholders resident in a 
foreign country that offers an exemption under an income tax 
convention.
    (ii) Participation in certain joint ventures. Notwithstanding 
paragraph (h)(3)(i) of this section, if a corporation is organized in a 
foreign country that provides an exemption only through an income tax 
convention with the United States, the foreign corporation will be 
treated as organized in a foreign country that grants an equivalent 
exemption under section 883 with respect to a category of income 
derived through participation, directly or indirectly, in a pool, 
partnership, strategic alliance, joint operating agreement, code-
sharing arrangement or other joint venture described in paragraph 
(e)(2) of this section, but only where treaty benefits would be 
available under the treaty but for the treatment of the pool, 
partnership, strategic alliance, joint operating agreement, code-
sharing arrangement or other joint venture as not fiscally transparent 
with respect to that category of income under the income tax laws of 
the foreign country in which the foreign corporate interest holder is 
organized for purposes of Sec.  1.894-1(d)(3)(iii)(A).
    (iii) Independent interpretation of income tax conventions. Nothing 
in this section and Sec. Sec.  1.883-2 through 1.883-5 affects the 
rights or obligations under any income tax convention. The definitions 
provided in this section and Sec. Sec.  1.883-2 through 1.883-5 shall 
neither give meaning to similar terms used in income tax conventions 
nor provide guidance regarding the scope of any exemption provided by 
such conventions, unless an income tax convention that entered into 
force after August 26, 2003 or its legislative history explicitly 
refers to section 883 and guidance thereunder for its meaning.
    (4) Exemptions not qualifying as equivalent exemptions--(i) General 
rule. Certain types of exemptions provided to corporations organized in 
the United States by foreign countries do not satisfy the equivalent 
exemption requirements of this section. Paragraphs (h)(4)(ii) through 
(vii) of this section provide descriptions of some of the types of 
exemptions that do not qualify as equivalent exemptions for purposes of 
this section.
    (ii) Reduced tax rate or time limited exemption. The exemption 
granted by the foreign country's law or income tax convention must be a 
complete exemption. The exemption may not constitute merely a reduction 
to a

[[Page 51406]]

nonzero rate of tax levied against the income of corporations organized 
in the United States derived from the international operation of ships 
or aircraft or a temporary reduction to a zero rate of tax, such as in 
the case of a tax holiday.
    (iii) Inbound or outbound freight tax. With respect to the carriage 
of cargo, the foreign country must provide an exemption from tax for 
income from transporting freight both inbound and outbound. For 
example, a foreign country that imposes tax only on outbound freight 
will not be treated as granting an equivalent exemption for income from 
transporting freight inbound into that country.
    (iv) Exemptions for limited types of cargo. A foreign country must 
provide an exemption from tax for income from transporting all types of 
cargo. For example, if a foreign country were generally to impose tax 
on income from the international carriage of cargo but were to provide 
a statutory exemption for income from transporting agricultural 
products, the foreign country would not be considered to grant an 
equivalent exemption with respect to income from the international 
carriage of cargo, including agricultural products.
    (v) Territorial tax systems. A foreign country with a territorial 
tax system will be treated as granting an equivalent exemption if it 
treats all income derived from the international operation of ships or 
aircraft derived by a U.S. corporation as an entirely foreign source 
and therefore not subject to tax, including income derived from a 
voyage or flight that begins or ends in that foreign country.
    (vi) Countries that tax on a residence basis. A foreign country 
that provides an equivalent exemption to corporations organized in the 
United States but also imposes a residence-based tax on certain 
corporations organized in the United States may nevertheless be 
considered to grant an equivalent exemption if the residence-based tax 
is imposed only on a corporation organized in the United States that 
maintains its center of management and control or other comparable 
attributes in that foreign country. If the residence-based tax is 
imposed on corporations organized in the United States and engaged in 
the international operation of ships or aircraft that are not managed 
and controlled in that foreign country, the foreign country shall not 
be treated as a qualified foreign country and shall not be considered 
to grant an equivalent exemption for purposes of this section.
    (vii) Exemptions within categories of income. With respect to 
paragraphs (h)(2)(i) through (v), (vii), and (viii) of this section, a 
foreign country must provide an exemption from tax for all income in a 
category of income, as defined in paragraph (h)(2) of this section. For 
example, a country that exempts income from the bareboat charter of 
passenger aircraft but not the bareboat charter of cargo aircraft does 
not provide an equivalent exemption. However, an equivalent exemption 
may be available for income derived from the international operation of 
ships even though income derived from the international operation of 
aircraft may not be exempt, and vice versa. With respect to paragraph 
(h)(2)(vi) of this section, a foreign country may be considered to 
grant an equivalent exemption for one or more types of income described 
in paragraph (g)(1) of this section.
    (i) Treatment of possessions. For purposes of this section, a 
possession of the United States will be treated as a foreign country. A 
possession of the United States will be considered to grant an 
equivalent exemption and will be treated as a qualified foreign country 
if it applies a mirror system of taxation. If a possession does not 
apply a mirror system of taxation, the possession may nevertheless be a 
qualified foreign country if, for example, it provides for an 
equivalent exemption through its internal law. A possession applies the 
mirror system of taxation if the U.S. Internal Revenue Code of 1986, as 
amended, applies in the possession with the name of the possession used 
instead of ``United States'' where appropriate.
    (j) Expenses related to qualified income. If a qualified foreign 
corporation derives qualified income from the international operation 
of ships or aircraft as well as income that is not qualified income, 
and the nonqualified income is effectively connected with the conduct 
of a trade or business within the United States, the foreign 
corporation may not deduct from such nonqualified income any amount 
otherwise allowable as a deduction from qualified income, if that 
qualified income is excluded under this section. See section 265(a)(1).

0
Par. 4. Sections 1.883-2 through 1.883-5 are added to read as follows:


Sec.  1.883-2  Treatment of publicly-traded corporations.

    (a) General rule. A foreign corporation satisfies the stock 
ownership test of Sec.  1.883-1(c)(2) if it is considered a publicly-
traded corporation and satisfies the substantiation and reporting 
requirements of paragraphs (e) and (f) of this section. To be 
considered a publicly-traded corporation, the stock of the foreign 
corporation must be primarily traded and regularly traded, as defined 
in paragraphs (c) and (d) of this section, respectively, on one or more 
established securities markets, as defined in paragraph (b) of this 
section, in either the United States or any qualified foreign country.
    (b) Established securities market--(1) General rule. For purposes 
of this section, the term established securities market means, for any 
taxable year--
    (i) A foreign securities exchange that is officially recognized, 
sanctioned, or supervised by a governmental authority of the qualified 
foreign country in which the market is located, and has an annual value 
of shares traded on the exchange exceeding $1 billion during each of 
the three calendar years immediately preceding the beginning of the 
taxable year;
    (ii) A national securities exchange that is registered under 
section 6 of the Securities Act of 1934 (15 U.S.C. 78f);
    (iii) A United States over-the-counter market, as defined in 
paragraph (b)(4) of this section;
    (iv) Any exchange designated under a Limitation on Benefits article 
in a United States income tax convention; and
    (v) Any other exchange that the Secretary may designate by 
regulation or otherwise.
    (2) Exchanges with multiple tiers. If an exchange in a foreign 
country has more than one tier or market level on which stock may be 
separately listed or traded, each such tier shall be treated as a 
separate exchange.
    (3) Computation of dollar value of stock traded. For purposes of 
paragraph (b)(1)(i) of this section, the value in U.S. dollars of 
shares traded during a calendar year shall be determined on the basis 
of the dollar value of such shares traded as reported by the 
International Federation of Stock Exchanges located in Paris, or, if 
not so reported, then by converting into U.S. dollars the aggregate 
value in local currency of the shares traded using an exchange rate 
equal to the average of the spot rates on the last day of each month of 
the calendar year.
    (4) Over-the-counter market. An over-the-counter market is any 
market reflected by the existence of an interdealer quotation system. 
An interdealer quotation system is any system of general circulation to 
brokers and dealers that regularly disseminates quotations of stocks 
and securities by identified brokers or dealers, other than by 
quotation sheets that are prepared and distributed by a broker or 
dealer in the regular course of business and that

[[Page 51407]]

contain only quotations of such broker or dealer.
    (5) Discretion to determine that an exchange does not qualify as an 
established securities market. The Commissioner may determine that a 
securities exchange that otherwise meets the requirements of paragraph 
(b) of this section does not qualify as an established securities 
market, if--
    (i) The exchange does not have adequate listing, financial 
disclosure, or trading requirements (or does not adequately enforce 
such requirements); or
    (ii) There is not clear and convincing evidence that the exchange 
ensures the active trading of listed stocks.
    (c) Primarily traded. For purposes of this section, stock of a 
corporation is primarily traded in a country on one or more established 
securities markets, as defined in paragraph (b) of this section, if, 
with respect to each class of stock described in paragraph (d)(1)(i) of 
this section (relating to classes of stock relied on to meet the 
regularly traded test)--
    (1) The number of shares in each such class that are traded during 
the taxable year on all established securities markets in that country 
exceeds.
    (2) The number of shares in each such class that are traded during 
that year on established securities markets in any other single 
country.
    (d) Regularly traded--(1) General rule. For purposes of this 
section, stock of a corporation is regularly traded on one or more 
established securities markets, as defined in paragraph (b) of this 
section, if--
    (i) One or more classes of stock of the corporation that, in the 
aggregate, represent more than 50 percent of the total combined voting 
power of all classes of stock of such corporation entitled to vote and 
of the total value of the stock of such corporation are listed on such 
market or markets during the taxable year; and
    (ii) With respect to each class relied on to meet the more than 50 
percent requirement of paragraph (d)(1)(i) of this section--
    (A) Trades in each such class are effected, other than in de 
minimis quantities, on such market or markets on at least 60 days 
during the taxable year (or \1/6\ of the number of days in a short 
taxable year); and
    (B) The aggregate number of shares in each such class that are 
traded on such market or markets during the taxable year are at least 
10 percent of the average number of shares outstanding in that class 
during the taxable year (or, in the case of a short taxable year, a 
percentage that equals at least 10 percent of the average number of 
shares outstanding in that class during the taxable year multiplied by 
the number of days in the short taxable year, divided by 365).
    (2) Classes of stock traded on a domestic established securities 
market treated as meeting trading requirements. A class of stock that 
is traded during the taxable year on an established securities market 
located in the United States shall be considered to meet the trading 
requirements of paragraph (d)(1)(ii) of this section if the stock is 
regularly quoted by dealers making a market in the stock. A dealer 
makes a market in a stock only if the dealer regularly and actively 
offers to, and in fact does, purchase the stock from, and sell the 
stock to, customers who are not related persons (as defined in section 
954(d)(3)) with respect to the dealer in the ordinary course of a trade 
or business.
    (3) Closely-held classes of stock not treated as meeting trading 
requirements--(i) General rule. Except as provided in paragraph 
(d)(3)(ii) of this section, a class of stock of a foreign corporation 
that otherwise meets the requirements of paragraph (d)(1) or (2) of 
this section shall not be treated as meeting such requirements for a 
taxable year if, for more than half the number of days during the 
taxable year, one or more persons who own at least 5 percent of the 
vote and value of the outstanding shares of the class of stock, as 
determined under paragraph (d)(3)(iii) of this section (each a 5-
percent shareholder), own, in the aggregate, 50 percent or more of the 
vote and value of the outstanding shares of the class of stock. If one 
or more 5-percent shareholders own, in the aggregate, 50 percent or 
more of the vote and value of the outstanding shares of the class of 
stock, such shares held by the 5-percent shareholders will constitute a 
closely-held block of stock.
    (ii) Exception. Paragraph (d)(3)(i) of this section shall not apply 
to a class of stock if the foreign corporation can establish that 
qualified shareholders, as defined in Sec.  1.883-4(b), applying the 
attribution rules of Sec.  1.883-4(c), own sufficient shares in the 
closely-held block of stock to preclude nonqualified shareholders in 
the closely-held block of stock from owning 50 percent or more of the 
total value of the class of stock of which the closely-held block is a 
part for more than half the number of days during the taxable year. Any 
shares that are owned, after application of the attribution rules in 
Sec.  1.883-4(c), by a qualified shareholder shall not also be treated 
as owned by a nonqualified shareholder in the chain of ownership for 
purposes of the preceding sentence. A foreign corporation must obtain 
the documentation described in Sec.  1.883-4(d) from the qualified 
shareholders relied upon to satisfy this exception. However, no person 
shall be treated for purposes of this paragraph (d)(3) as a qualified 
shareholder if such person holds an interest in the class of stock 
directly or indirectly through bearer shares.
    (iii) Five-percent shareholders--(A) Related persons. Solely for 
purposes of determining whether a person is a 5-percent shareholder, 
persons related within the meaning of section 267(b) shall be treated 
as one person. In determining whether two or more corporations are 
members of the same controlled group under section 267(b)(3), a person 
is considered to own stock owned directly by such person, stock owned 
through the application of section 1563(e)(1), and stock owned through 
the application of section 267(c). In determining whether a corporation 
is related to a partnership under section 267(b)(10), a person is 
considered to own the partnership interest owned directly by such 
person and the partnership interest owned through the application of 
section 267(e)(3).
    (B) Investment companies. For purposes of this paragraph (d)(3), an 
investment company registered under the Investment Company Act of 1940, 
as amended (54 Stat. 789), shall not be treated as a 5-percent 
shareholder.
    (4) Anti-abuse rule. Trades between or among related persons 
described in section 267(b), as modified by paragraph (d)(3)(iii) of 
this section, and trades conducted in order to meet the requirements of 
paragraph (d)(1) of this section shall be disregarded. A class of stock 
shall not be treated as meeting the trading requirements of paragraph 
(d)(1) of this section if there is a pattern of trades conducted to 
meet the requirements of that paragraph. For example, trades between 
two persons that occur several times during the taxable year may be 
treated as an arrangement or a pattern of trades conducted to meet the 
trading requirements of paragraph (d)(1)(ii) of this section.
    (5) Example. The closely-held test in paragraph (d)(3) of this 
section is illustrated by the following example:

    Example. Closely-held exception--(i) Facts. X is a foreign 
corporation organized in a qualified foreign country and engaged in 
the international operation of ships. X has one class of stock, 
which is primarily traded on an established securities market in the 
qualified foreign country. The stock of X meets the regularly traded 
requirements of paragraph (d)(1)(ii) of this section without

[[Page 51408]]

regard to paragraph (d)(3)(i) of this section. A, B, C and D are 
four members of the corporation's founding family who each own, 
during the entire taxable year, 25 percent of the stock of Hold Co., 
a company that issues registered shares. Hold Co., in turn, owns 60 
percent of the stock of X during the entire taxable year. The 
remaining 40 percent of the stock of X is not owned by any 5-percent 
shareholder, as determined under paragraph (d)(3)(iii) of this 
section. A, B, and C are not residents of a qualified foreign 
country, but D is a resident of a qualified foreign country.
    (ii) Analysis. Because Hold Co. owns 60 percent of the stock of 
X for more than half the number of days during the taxable year, 
Hold Co. is a 5-percent shareholder that owns 50 percent or more of 
the value of the stock of X. Thus, the shares owned by Hold Co. 
constitute a closely-held block of stock. Under paragraph (d)(3)(i) 
of this section, the stock of X will not be regularly traded within 
the meaning of paragraph (d)(1) of this section unless X can 
establish, under paragraph (d)(3)(ii) of this section, that 
qualified shareholders within the closely-held block of stock own 
sufficient shares in the closely-held block of stock to preclude 
nonqualified shareholders in the closely-held block of stock from 
owning 50 percent or more of the value of the outstanding shares in 
the class of stock for more than half the number of days during the 
taxable year. A, B, and C are not qualified shareholders within the 
meaning of Sec.  1.883-4(b) because they are not residents of a 
qualified foreign country, but D is a resident of a qualified 
foreign country and therefore is a qualified shareholder. D owns 15 
percent of the outstanding shares of X through Hold Co. (25 percent 
x 60 percent = 15 percent) while A, B, and C in the aggregate own 45 
percent of the outstanding shares of X through Hold Co.. D, 
therefore, owns sufficient shares in the closely-held block of stock 
to preclude the nonqualified shareholders in the closely-held block 
of stock, A, B and C, from owning 50 percent or more of the value of 
the class of stock (60 percent-15 percent = 45 percent) of which the 
closely-held block is a part. Provided that X obtains from D the 
documentation described in Sec.  1.883-4(d), X's sole class of stock 
meets the exception in paragraph (d)(3)(ii) of this section and will 
not be disqualified from the regularly traded test by virtue of 
paragraph (d)(3)(i) of this section.
    (e) Substantiation that a foreign corporation is publicly traded--
(1) General rule. A foreign corporation that relies on the publicly 
traded test of this section to meet the stock ownership test of Sec.  
1.883-1(c)(2) must substantiate that the stock of the foreign 
corporation is primarily and regularly traded on one or more 
established securities markets, as that term is defined in paragraph 
(b) of this section. If one of the classes of stock on which the 
foreign corporation relies to meet this test is closely-held within the 
meaning of paragraph (d)(3)(i) of this section, the foreign corporation 
must obtain an ownership statement described in Sec.  1.883-4(d) from 
each qualified shareholder and intermediary that it relies upon to 
satisfy the exception to the closely-held test, but only to the extent 
such statement would be required if the foreign corporation were 
relying on the qualified shareholder stock ownership test of Sec.  
1.883-4 with respect to those shares of stock. The foreign corporation 
must also maintain and provide to the Commissioner upon request a list 
of its shareholders of record and any other relevant information known 
to the foreign corporation supporting its entitlement to an exemption 
under this section.
    (2) Availability and retention of documents for inspection. The 
documentation described in paragraph (e)(1) of this section must be 
retained by the corporation seeking qualified foreign corporation 
status until the expiration of the statute of limitations for the 
taxable year of the foreign corporation to which the documentation 
relates. Such documentation must be made available for inspection by 
the Commissioner at such time and such place as the Commissioner may 
request in writing.
    (f) Reporting requirements. A foreign corporation relying on this 
section to satisfy the stock ownership test of Sec.  1.883-1(c)(2) must 
provide the following information in addition to the information 
required in Sec.  1.883-1(c)(3) to be included in its Form 1120-F, 
``U.S. Income Tax Return of a Foreign Corporation,'' for the taxable 
year. The information must be current as of the end of the 
corporation's taxable year and must include the following--
    (1) The name of the country in which the stock is primarily traded;
    (2) The name of the established securities market or markets on 
which the stock is listed;
    (3) A description of each class of stock relied upon to meet the 
requirements of paragraph (d) of this section, including the number of 
shares issued and outstanding as of the close of the taxable year;
    (4) For each class of stock relied upon to meet the requirements of 
paragraph (d) of this section, if one or more 5-percent shareholders, 
as defined in paragraph (d)(3)(i) of this section, own in the aggregate 
50 percent or more of the vote and value of the outstanding shares of 
that class of stock for more than half the number of days during the 
taxable year--
    (i) The days during the taxable year of the corporation in which 
the stock was closely-held without regard to the exception in paragraph 
(d)(3)(ii) of this section and the percentage of the vote and value of 
the class of stock that is owned by 5-percent shareholders during such 
days;
    (ii) For each qualified shareholder who owns or is treated as 
owning stock in the closely-held block upon whom the corporation 
intends to rely to satisfy the exception to the closely-held test of 
paragraph (d)(3)(ii) of this section--
    (A) The name of each such shareholder;
    (B) The percentage of the total value of the class of stock held by 
each such shareholder and the days during which the stock was held;
    (C) The address of record of each such shareholder; and
    (D) The country of residence of each such shareholder, determined 
under Sec.  1.883-4(b)(2) (residence of individual shareholders) or 
Sec.  1.883-4(d)(3) (special rules for residence of certain 
shareholders); and
    (5) Any other relevant information specified by Form 1120-F and its 
accompanying instructions.


Sec.  1.883-3  Treatment of controlled foreign corporations.

    (a) General rule. A foreign corporation satisfies the stock 
ownership test of Sec.  1.883-1(c)(2) if it is a controlled foreign 
corporation (CFC), as defined in section 957(a), and satisfies the 
income inclusion test in paragraph (b) of this section and the 
substantiation and reporting requirements of paragraphs (c) and (d) of 
this section, respectively. A CFC that fails the income inclusion test 
of paragraph (b) of this section will not be a qualified foreign 
corporation unless it meets either the publicly traded test of Sec.  
1.883-2(a) or the qualified shareholder stock ownership test of Sec.  
1.883-4(a).
    (b) Income inclusion test--(1) General rule. A CFC shall not be 
considered to satisfy the requirements of paragraph (a) of this section 
unless more than 50 percent of the CFC's adjusted net foreign base 
company income (as defined in Sec.  1.954-1(d) and as increased or 
decreased by section 952(c)) derived from the international operation 
of ships or aircraft is includible in the gross income of one or more 
United States citizens, individual residents of the United States or 
domestic corporations, pursuant to section 951(a)(1)(A) or another 
provision of the Internal Revenue Code, for the taxable years of such 
persons in which the taxable year of the CFC ends.
    (2) Examples. The income inclusion test of paragraph (b)(1) of this 
section is illustrated in the following examples:

    Example 1. Ship Co is a CFC organized in a qualified foreign 
country. All of Ship Co's income is foreign base company shipping 
income that is derived from the international

[[Page 51409]]

operation of ships. All of its shares are owned by a domestic 
partnership that is a United States shareholder for purposes of 
section 951(b). All of the partners in the domestic partnership are 
citizens and residents of foreign countries. Ship Co fails the 
income inclusion test of paragraph (b)(1) of this section because no 
amount of Ship Co's subpart F income that is adjusted net foreign 
base company income derived from the international operation of 
ships is includible under any provision of the Internal Revenue Code 
in the gross income of one or more United States citizens, 
individual residents of the United States or domestic corporations. 
Therefore, Ship Co must satisfy the qualified shareholder stock 
ownership test of Sec.  1.883-4(a), in order to satisfy the stock 
ownership test of Sec.  1.883-1(c)(2) and to be considered a 
qualified foreign corporation.
    Example 2. Ship Co is a CFC organized in a qualified foreign 
country. All of Ship Co's income is foreign base company shipping 
income that is derived from the international operation of ships. 
Corp A, a domestic corporation, owns 50 percent of the value of the 
stock of Ship Co. X, a domestic partnership, owns the remaining 50 
percent of the value of the stock of Ship Co. A United States 
citizen is a partner owning a 10 percent income interest in X. 
Individual partners owning 90 percent of X are citizens and 
residents of foreign countries. There are no special allocations of 
partnership income. Ship Co satisfies the income inclusion test of 
paragraph (b)(1) of this section because 55 percent (50 percent + 
(10 percent x 50 percent)) of the subpart F income that is adjusted 
net foreign base company income derived from the international 
operation of ships would be includible in the gross income of U.S. 
citizens, individual residents of the United States or domestic 
corporations. If Ship Co satisfies the substantiation and reporting 
requirements of paragraphs (c) and (d) of this section, it will meet 
the stock ownership test of Sec.  1.883-1(c)(2).

    (c) Substantiation of CFC stock ownership--(1) General rule. A 
foreign corporation that relies on this section to satisfy the stock 
ownership test of Sec.  1.883-1(c)(2) must substantiate all the facts 
necessary to satisfy the Commissioner that it qualifies under the 
income inclusion test of paragraph (b)(1) of this section. For purposes 
of the income inclusion test, if the CFC has one or more United States 
shareholders, as defined in section 951(b), that are domestic 
partnerships, estates, or trusts, the pro rata share of the subpart F 
income includible in the gross income of such shareholders will only be 
treated as includible in the income of any partner, beneficiary or 
other interest owner of such United States shareholder that is a United 
States citizen, resident of the United States or a domestic corporation 
if the CFC obtains the documentation described in paragraph (c)(2) of 
this section.
    (2) Documentation from certain United States shareholders--(i) 
General rule. A CFC only meets the documentation requirements of 
paragraph (c)(1) of this section if the CFC obtains the following 
documentation with respect to each United States shareholder, as 
defined in section 951(b), that is a partnership, estate or trust, for 
the taxable year of the shareholder which ends with or within the 
taxable year of the CFC--
    (A) A copy of the Form 5471, ``Information Return of U.S. Persons 
with Respect to Certain Foreign Corporations,'' filed with the 
controlling United States shareholder's return;
    (B) A written statement, signed under penalties of perjury by a 
person authorized to sign the U.S. Federal tax return of each such 
United States shareholder, providing the following information with 
respect to each United States citizen, individual resident of the 
United States or domestic corporation that is a partner, beneficiary or 
other interest owner of each such United States shareholder and upon 
whom the CFC intends to rely to satisfy the income inclusion test of 
paragraph (b)(1) of this section--
    (1) The name, address from the CFC's corporate records (that is a 
specific street address and not a nonresidential address, such as a 
post office box or in care of a financial intermediary or stock 
transfer agent), and taxpayer identification number of the interest 
owner;
    (2) The interest owner's proportionate interest in the United 
States shareholder that reflects that owner's share of subpart F income 
required to be included in income on such interest owner's U.S. Federal 
income tax return;
    (3) The percentage of the value of shares of the CFC owned by each 
such interest owner pursuant to the attribution rules in Sec.  1.883-
4(c); and
    (C) Any other information as specified in guidance published by the 
Internal Revenue Service (see Sec.  601.601(d)(2) of this chapter).
    (ii) Availability and retention of documents for inspection. The 
documentation described in paragraph (c)(2)(i) of this section must be 
retained by the corporation seeking qualified foreign corporation 
status (the CFC) until the expiration of the statute of limitations for 
the taxable year of the CFC to which the documentation relates. Such 
documentation must be made available for inspection by the Commissioner 
at such place as the Commissioner may request in writing.
    (d) Reporting requirements. A foreign corporation that relies on 
the CFC test of this section to satisfy the stock ownership test of 
Sec.  1.883-1(c)(2) must provide the following information in addition 
to the information required in Sec.  1.883-1(c)(3) to be included in 
its Form 1120-F, ``U.S. Income Tax Return of a Foreign Corporation,'' 
for the taxable year. The information must be current as of the end of 
the corporation's taxable year and must include the following--
    (1) The name, address from the CFC's corporate records (that is a 
specific street address and not a nonresidential address, such as a 
post office box or in care of a financial intermediary or stock 
transfer agent), and taxpayer identification number of each United 
States shareholder, as defined in section 951(b), of the CFC;
    (2) The percentage of the vote and value of the shares of the CFC 
that is owned by each United States shareholder, as defined in section 
951(b);
    (3) If one or more of the United States shareholders is a domestic 
partnership, estate or trust, the name, address, taxpayer 
identification number and the percentage of the value of shares of the 
CFC owned (as determined under Sec.  1.883-4(c)) by each interest owner 
of each such United States shareholder that is a United States citizen, 
individual resident of the United States or a domestic corporation; and
    (4) Any other relevant information specified by Form 1120-F and its 
accompanying instructions.


Sec.  1.883-4  Qualified shareholder stock ownership test.

    (a) General rule. A foreign corporation satisfies the stock 
ownership test of Sec.  1.883-1(c)(2) if more than 50 percent of the 
value of its outstanding shares is owned, or treated as owned by 
applying the attribution rules of paragraph (c) of this section, for at 
least half of the number of days in the foreign corporation's taxable 
year by one or more qualified shareholders, as defined in paragraph (b) 
of this section. A shareholder may be a qualified shareholder with 
respect to one category of income while not being a qualified 
shareholder with respect to another. A foreign corporation will not be 
considered to satisfy the stock ownership test of Sec.  1.883-1(c)(2) 
pursuant to this section unless the foreign corporation meets the 
substantiation and reporting requirements of paragraphs (d) and (e) of 
this section.
    (b) Qualified shareholder--(1) General rule. A shareholder is a 
qualified shareholder only if the shareholder--
    (i) With respect to the category of income for which the foreign

[[Page 51410]]

corporation is seeking an exemption, is--
    (A) An individual who is a resident, as described in paragraph 
(b)(2) of this section, of a qualified foreign country;
    (B) The government of a qualified foreign country (or a political 
subdivision or local authority of such country);
    (C) A foreign corporation that is organized in a qualified foreign 
country and meets the publicly traded test of Sec.  1.883-2(a);
    (D) A not-for-profit organization described in paragraph (b)(4) of 
this section that is not a pension fund as defined in paragraph (b)(5) 
of this section and that is organized in a qualified foreign country;
    (E) An individual beneficiary of a pension fund (as defined in 
paragraph (b)(5)(iv) of this section) that is administered in or by a 
qualified foreign country, who is treated as a resident under paragraph 
(d)(3)(iii) of this section, of a qualified foreign country; or
    (F) A shareholder of a foreign corporation that is an airline 
covered by a bilateral Air Services Agreement in force between the 
United States and the qualified foreign country in which the airline is 
organized, provided the United States has not waived the ownership 
requirement in the Air Services Agreement, or that the ownership 
requirement has not otherwise been made ineffective;
    (ii) Does not own its interest in the foreign corporation through 
bearer shares, either directly or by applying the attribution rules of 
paragraph (c) of this section; and
    (iii) Provides to the foreign corporation the documentation 
required in paragraph (d) of this section and the foreign corporation 
meets the reporting requirements of paragraph (e) of this section with 
respect to such shareholder.
    (2) Residence of individual shareholders--(i) General rule. An 
individual described in paragraph (b)(1)(i)(A) of this section is a 
resident of a qualified foreign country only if the individual is fully 
liable to tax as a resident in such country (e.g., an individual who is 
liable to tax on a remittance basis in a foreign country will not be 
treated as a resident of that country unless all residents of that 
country are taxed on a remittance basis only) and, in addition--
    (A) The individual has a tax home, within the meaning of paragraph 
(b)(2)(ii) of this section, in that qualified foreign country for 183 
days or more of the taxable year; or
    (B) The individual is treated as a resident of a qualified foreign 
country based on special rules pursuant to paragraph (d)(3) of this 
section.
    (ii) Tax home. For purposes of this section, an individual's tax 
home is considered to be located at the individual's regular or 
principal (if more than one regular) place of business. If the 
individual has no regular or principal place of business because of the 
nature of his business (or lack of a business), then the individual's 
tax home is located at his regular place of abode in a real and 
substantial sense. If an individual has no regular or principal place 
of business and no regular place of abode in a real and substantial 
sense in a qualified foreign country for 183 days or more of the 
taxable year, that individual does not have a tax home for purposes of 
this section. A foreign estate or trust, as defined in section 
7701(a)(31), does not have a tax home for purposes of this section. See 
paragraph (c)(3) of this section for alternative rules in the case of 
trusts or estates.
    (3) Certain income tax convention restrictions applied to 
shareholders. For purposes of paragraph (b)(1) of this section, a 
shareholder described in paragraph (b)(1) of this section may be 
considered a resident of, or organized in, a qualified foreign country 
if that foreign country provides an exemption by means of an income tax 
convention with the United States, but only if the shareholder 
demonstrates that it is treated as a resident of that country under the 
convention and qualifies for benefits under any Limitation on Benefits 
article, and that the convention provides an exemption for the relevant 
category of income. If the convention has a requirement in the shipping 
and air transport article other than residence, such as place of 
registration or documentation of the ship or aircraft, the shareholder 
is not required to demonstrate that the corporation seeking qualified 
foreign corporation status could satisfy any such additional 
requirement.
    (4) Not-for-profit organizations. The term not-for-profit 
organization means an organization that meets the following 
requirements--
    (i) It is a corporation, association taxable as a corporation, 
trust, fund, foundation, league or other entity operated exclusively 
for religious, charitable, educational, or recreational purposes, and 
not organized for profit;
    (ii) It is generally exempt from tax in its country of organization 
by virtue of its not-for-profit status; and
    (iii) Either--
    (A) More than 50 percent of its annual support is expended on 
behalf of individuals described in paragraph (b)(1)(i)(A) of this 
section (see paragraph (d)(3)(v) of this section for special rules to 
substantiate the residence of individual beneficiaries of not-for-
profit organizations) and on behalf of U.S. exempt organizations that 
have received determination letters under section 501(c)(3); or
    (B) More than 50 percent of its annual support is derived from 
individuals described in paragraph (b)(1)(i)(A) of this section (see 
paragraph (d)(3)(v) of this section for special rules to substantiate 
the residence of individual supporters of not-for-profit 
organizations).
    (5) Pension funds--(i) Pension fund defined. The term pension fund 
shall mean a government pension fund or a nongovernment pension fund, 
as those terms are defined, respectively, in paragraphs (b)(5)(ii) and 
(iii) of this section, that is a trust, fund, foundation, or other 
entity that is established exclusively for the benefit of employees or 
former employees of one or more employers, the principal purpose of 
which is to provide retirement, disability, and death benefits to 
beneficiaries of such entity and persons designated by such 
beneficiaries in consideration for prior services rendered.
    (ii) Government pension funds. A government pension fund is a 
pension fund that is a controlled entity of a foreign sovereign within 
the principles of Sec.  1.892-2T(c)(1) (relating to pension funds 
established for the benefit of employees or former employees of a 
foreign government).
    (iii) Nongovernment pension funds. A nongovernment pension fund is 
a pension fund that--
    (A) Is administered in a foreign country and is subject to 
supervision or regulation by a governmental authority (or other 
authority delegated to perform such supervision or regulation by a 
governmental authority) in such country;
    (B) Is generally exempt from income taxation in its country of 
administration;
    (C) Has 100 or more beneficiaries; and
    (D) The trustees, directors or other administrators of which 
pension fund provide the documentation required in paragraph (d) of 
this section.
    (iv) Beneficiary of a pension fund. The term beneficiary of a 
pension fund shall mean any person who has made contributions to a 
pension fund, as that term is defined in paragraph (b)(5)(i) of this 
section, or on whose behalf contributions have been made, and who is 
currently receiving retirement,

[[Page 51411]]

disability, or death benefits from the pension fund or can reasonably 
be expected to receive such benefits in the future, whether or not the 
person's right to receive benefits from the fund has vested. See 
paragraph (c)(7) of this section for rules regarding the computation of 
stock ownership through nongovernment pension funds.
    (c) Rules for determining constructive ownership--(1) General rules 
for attribution. For purposes of applying paragraph (a) of this section 
and the exception to the closely-held test in Sec.  1.883-2(d)(3)(ii), 
stock owned by or for a corporation, partnership, trust, estate, or 
mutual insurance company or similar entity shall be treated as owned 
proportionately by its shareholders, partners, beneficiaries, grantors, 
or other interest holders, as provided in paragraphs (c)(2) through (7) 
of this section. The proportionate interest rules of this paragraph (c) 
shall apply successively upward through a chain of ownership, and a 
person's proportionate interest shall be computed for the relevant days 
or period taken into account in determining whether a foreign 
corporation satisfies the requirements of paragraph (a) of this 
section. Stock treated as owned by a person by reason of this paragraph 
(c) shall be treated as actually owned by such person for purposes of 
this section. An owner of an interest in an association taxable as a 
corporation shall be treated as a shareholder of such association for 
purposes of this paragraph (c). No attribution will apply to an 
interest held directly or indirectly through bearer shares.
    (2) Partnerships--(i) General rule. A partner shall be treated as 
having an interest in stock of a foreign corporation owned by a 
partnership in proportion to the least of--
    (A) The partner's percentage distributive share of the 
partnership's dividend income from the stock;
    (B) The partner's percentage distributive share of gain from 
disposition of the stock by the partnership; or
    (C) The partner's percentage distributive share of the stock (or 
proceeds from the disposition of the stock) upon liquidation of the 
partnership.
    (ii) Partners resident in the same country. For purposes of this 
paragraph, all qualified shareholders that are partners in a 
partnership and that are residents of, or organized in, the same 
qualified foreign country shall be treated as one partner. Thus, the 
percentage distributive shares of dividend income, gain and liquidation 
rights of all qualified shareholders that are partners in a partnership 
and that are residents of, or organized in, the same qualified foreign 
country are aggregated prior to determining the least of the three 
percentages set out in paragraph (c)(2)(i) of this section. For the 
meaning of the term resident, see paragraph (b)(2) of this section.
    (iii) Examples. The rules of paragraph (c)(2)(ii) of this section 
are illustrated by the following examples:

    Example 1. Stock held solely by qualified shareholders through a 
partnership. Country X grants an equivalent exemption. A and B are 
individual residents of Country X and are qualified shareholders 
within the meaning of paragraph (b)(1) of this section. A and B are 
the sole partners of Partnership P. P's only asset is the stock of 
Corporation Z, a Country X corporation seeking a reciprocal 
exemption under this section. A's distributive share of P's income 
and gain on the disposition of P's assets is 80 percent, but A's 
distributive share of P's assets (or the proceeds therefrom) on P's 
liquidation is 20 percent. B's distributive share of P's income and 
gain is 20 percent and B is entitled to 80 percent of the assets (or 
proceeds therefrom) on P's liquidation. Under the attribution rules 
of paragraph (c)(2)(ii) of this section, A and B will be treated as 
a single partner owning in the aggregate 100 percent of the stock of 
Z owned by P.
    Example 2. Stock held by both qualified and nonqualified 
shareholders through a partnership. Assume the same facts as in 
Example 1 except that C, an individual who is not a resident of a 
qualified foreign country, is also a partner in P and that C's 
distributive share of P's income is 60 percent. The distributive 
shares of A and B are the same as in Example 1, except that A's 
distributive share of income is 20 percent. Under the attribution 
rules of paragraph (c)(2)(ii) of this section, qualified 
shareholders A and B will be treated as a single partner owning in 
the aggregate 40 percent of the stock of Z owned by P (i.e., the 
lowest aggregate percentage of A and B's distributive shares of 
dividend income (40 percent), gain (100 percent), and liquidation 
rights (100 percent) with respect to the Z stock). Thus, only 40 
percent of the Z stock is treated as owned by qualified 
shareholders.
    Example 3. Stock held through tiered partnerships. Country X 
grants an equivalent exemption. A and B are individual residents of 
Country X and are qualified shareholders within the meaning of 
paragraph (b)(1) of this section. A and B are the sole partners of 
Partnership P. P is a partner in Partnership P1, which owns the 
stock of Corporation Z, a Country X corporation seeking a reciprocal 
exemption under this section. Assume that P's distributive share of 
the dividend income, gain and liquidation rights with respect to the 
Z stock held by P1 is 40 percent. Assume that of the remaining 
partners of P1 only D is a qualified shareholder. D's distributive 
share of P1's dividend income and gain is 15 percent; D's 
distributive share of P1's assets on liquidation is 25 percent. 
Under the attribution rules of paragraph (c)(2)(ii) of this section, 
A and B, treated as a single partner, will own 40 percent of the Z 
stock owned by P1 (100 percent x 40 percent) and D will be treated 
as owning 15 percent of the Z stock owned by P1 (the least of D's 
dividend income (15 percent), gain (15 percent), and liquidation 
rights (25 percent) with respect to the Z stock). Thus, 55 percent 
of the Z stock owned by P1 is treated as owned by qualified 
shareholders.

    (3) Trusts and estates--(i) Beneficiaries. In general, an 
individual shall be treated as having an interest in stock of a foreign 
corporation owned by a trust or estate in proportion to the 
individual's actuarial interest in the trust or estate, as provided in 
section 318(a)(2)(B)(i), except that an income beneficiary's actuarial 
interest in the trust will be determined as if the trust's only asset 
were the stock. The interest of a remainder beneficiary in stock will 
be equal to 100 percent minus the sum of the percentages of any 
interest in the stock held by income beneficiaries. The ownership of an 
interest in stock owned by a trust shall not be attributed to any 
beneficiary whose interest cannot be determined under the preceding 
sentence, and any such interest, to the extent not attributed by reason 
of this paragraph (c)(3)(i), shall not be considered owned by a 
beneficiary unless all potential beneficiaries with respect to the 
stock are qualified shareholders. In addition, a beneficiary's 
actuarial interest will be treated as zero to the extent that someone 
other than the beneficiary is treated as owning the stock under 
paragraph (c)(3)(ii) of this section. A substantially separate and 
independent share of a trust, within the meaning of section 663(c), 
shall be treated as a separate trust for purposes of this paragraph 
(c)(3)(i), provided that payment of income, accumulated income or 
corpus of a share of one beneficiary (or group of beneficiaries) cannot 
affect the proportionate share of income, accumulated income or corpus 
of another beneficiary (or group of beneficiaries).
    (ii) Grantor trusts. A person is treated as the owner of stock of a 
foreign corporation owned by a trust to the extent that the stock is 
included in the portion of the trust that is treated as owned by the 
person under sections 671 through 679 (relating to grantors and others 
treated as substantial owners).
    (4) Corporations that issue stock. A shareholder of a corporation 
that issues stock shall be treated as owning stock of a foreign 
corporation that is owned by such corporation on any day in a 
proportion that equals the value of the stock owned by such shareholder 
to the value of all stock of such corporation. If, however, there is an 
agreement, express

[[Page 51412]]

or implied, that a shareholder of a corporation will not receive 
distributions from the earnings of stock owned by the corporation, the 
shareholder will not be treated as owning that stock owned by the 
corporation.
    (5) Taxable nonstock corporations. A taxable nonstock corporation 
that is entitled in its country of organization to deduct from its 
taxable income amounts distributed for charitable purposes may deem a 
recipient of such charitable distributions to be a shareholder of such 
taxable nonstock corporation in the same proportion as the amount that 
such beneficiary receives in the taxable year bears to the total income 
of such taxable nonstock corporation in the taxable year. Whether each 
such recipient is a qualified shareholder may then be determined under 
paragraph (b) of this section or under the special rules of paragraph 
(d)(3)(vii) of this section.
    (6) Mutual insurance companies and similar entities. Stock held by 
a mutual insurance company, mutual savings bank, or similar entity 
(including an association taxable as a corporation that does not issue 
stock interests) shall be considered owned proportionately by the 
policyholders, depositors, or other owners in the same proportion that 
such persons share in the surplus of such entity upon liquidation or 
dissolution.
    (7) Computation of beneficial interests in nongovernment pension 
funds. Stock held by a pension fund shall be considered owned by the 
beneficiaries of the fund equally on a pro-rata basis if--
    (i) The pension fund meets the requirements of paragraph 
(b)(5)(iii) of this section;
    (ii) The trustees, directors or other administrators of the pension 
fund have no knowledge, and no reason to know, that a pro-rata 
allocation of interests of the fund to all beneficiaries would differ 
significantly from an actuarial allocation of interests in the fund 
(or, if the beneficiaries' actuarial interest in the stock held 
directly or indirectly by the pension fund differs from the 
beneficiaries' actuarial interest in the pension fund, the actuarial 
interests computed by reference to the beneficiaries' actuarial 
interest in the stock);
    (iii) Either--
    (A) Any overfunding of the pension fund would be payable, pursuant 
to the governing instrument or the laws of the foreign country in which 
the pension fund is administered, only to, or for the benefit of, one 
or more corporations that are organized in the country in which the 
pension fund is administered, individual beneficiaries of the pension 
fund or their designated beneficiaries, or social or charitable causes 
(the reduction of the obligation of the sponsoring company or companies 
to make future contributions to the pension fund by reason of 
overfunding shall not itself result in such overfunding being deemed to 
be payable to or for the benefit of such company or companies); or
    (B) The foreign country in which the pension fund is administered 
has laws that are designed to prevent overfunding of a pension fund and 
the funding of the pension fund is within the guidelines of such laws; 
or
    (C) The pension fund is maintained to provide benefits to employees 
in a particular industry, profession, or group of industries or 
professions and employees of at least 10 companies (other than 
companies that are owned or controlled, directly or indirectly, by the 
same interests) contribute to the pension fund or receive benefits from 
the pension fund; and
    (iv) The trustees, directors or other administrators provide the 
relevant documentation as required in paragraph (d) of this section.
    (d) Substantiation of stock ownership--(1) General rule. A foreign 
corporation that relies on this section to satisfy the stock ownership 
test of Sec.  1.883-1(c)(2), must establish all the facts necessary to 
satisfy the Commissioner that more than 50 percent of the value of its 
shares is owned, or treated as owned applying paragraph (c) of this 
section, by qualified shareholders. A foreign corporation cannot meet 
this requirement with respect to any stock that is issued in bearer 
form. A shareholder that holds shares in the foreign corporation either 
directly or indirectly in bearer form cannot be a qualified 
shareholder.
    (2) Application of general rule--(i) Ownership statements. Except 
as provided in paragraph (d)(3) of this section, a person shall only be 
treated as a qualified shareholder of a foreign corporation if--
    (A) For the relevant period, the person completes an ownership 
statement described in paragraph (d)(4) of this section or has a valid 
ownership statement in effect under paragraph (d)(2)(ii) of this 
section;
    (B) In the case of a person owning stock in the foreign corporation 
indirectly through one or more intermediaries (including mere legal 
owners or recordholders acting as nominees), each intermediary in the 
chain of ownership between that person and the foreign corporation 
seeking qualified foreign corporation status completes an intermediary 
ownership statement described in paragraph (d)(4)(v) of this section or 
has a valid intermediary ownership statement in effect under paragraph 
(d)(2)(ii) of this section; and
    (C) The foreign corporation seeking qualified foreign corporation 
status obtains the statements described in paragraphs (d)(2)(i)(A) and 
(B) of this section.
    (ii) Three-year period of validity. The ownership statements 
required in paragraph (d)(2)(i) of this section shall remain valid 
until the earlier of the last day of the third calendar year following 
the year in which the ownership statement is signed, or the day that a 
change of circumstance occurs that makes any information on the 
ownership statement incorrect. For example, an ownership statement 
signed on September 30, 2000, remains valid through December 31, 2003, 
unless a change of circumstance occurs that makes any information on 
the ownership statement incorrect.
    (3) Special rules--(i) Substantiating residence of certain 
shareholders. A foreign corporation seeking qualified foreign 
corporation status or an intermediary that is a direct or indirect 
shareholder of such foreign corporation may substantiate the residence 
of certain shareholders, for purposes of paragraph (b)(2)(i)(B) of this 
section, under one of the following special rules in paragraphs 
(d)(3)(ii) through (viii) of this section, in lieu of obtaining the 
ownership statements required in paragraph (d)(2)(i) of this section 
from such shareholders.
    (ii) Special rule for registered shareholders owning less than one 
percent of widely-held corporations. A foreign corporation with at 
least 250 registered shareholders, that is not a publicly-traded 
corporation, as described in Sec.  1.883-2 (a widely-held corporation), 
is not required to obtain an ownership statement from an individual 
shareholder owning less than one percent of the widely-held corporation 
at all times during the taxable year if the requirements of paragraphs 
(d)(3)(ii)(A) and (B) of this section are satisfied. If the widely-held 
foreign corporation is the foreign corporation seeking qualified 
foreign corporation status, or an intermediary that meets the 
documentation requirements of paragraphs (d)(4)(v)(A) and (B) of this 
section, the widely-held foreign corporation may treat the address of 
record in its ownership records as the residence of any less than one 
percent individual shareholder if--
    (A) The individual's address of record is a specific street address 
and not a

[[Page 51413]]

nonresidential address, such as a post office box or in care of a 
financial intermediary or stock transfer agent; and
    (B) The officers and directors of the widely-held corporation 
neither know nor have reason to know that the individual does not 
reside at that address.
    (iii) Special rule for beneficiaries of pension funds--(A) 
Government pension fund. An individual who is a beneficiary of a 
government pension fund, as defined in paragraph (b)(5)(ii) of this 
section, may be treated as a resident of the country in which the 
pension fund is administered if the pension fund satisfies the 
documentation requirements of paragraphs (d)(4)(v)(A) and (C)(1) of 
this section.
    (B) Nongovernment pension fund. An individual who is a beneficiary 
of a nongovernment pension fund, as described in paragraph (b)(5)(iii) 
of this section, may be treated as a resident of the country of the 
beneficiary's address as it appears on the records of the fund, 
provided it is not a nonresidential address, such as a post office box 
or an address in care of a financial intermediary, and provided none of 
the trustees, directors or other administrators of the pension fund 
know, or have reason to know, that the beneficiary is not an individual 
resident of such foreign country. The rules of this paragraph 
(d)(3)(iii)(B) shall apply only if the nongovernment pension fund 
satisfies the documentation requirements of paragraphs (d)(4)(v)(A) and 
(C)(2) of this section.
    (iv) Special rule for stock owned by publicly-traded corporations. 
Any stock in a foreign corporation seeking qualified foreign 
corporation status that is owned by a publicly-traded corporation will 
be treated as owned by an individual resident in the country where the 
publicly-traded corporation is organized if the foreign corporation 
receives the statement described in paragraph (d)(4)(iii) of this 
section from the publicly-traded corporation and copies of any relevant 
ownership statements from shareholders of the publicly-traded 
corporation relied on to satisfy the exception to the closely-held test 
of Sec.  1.883-2(d)(3)(ii), as required in paragraph (d)(2)(i) of this 
section.
    (v) Special rule for not-for-profit organizations. For purposes of 
meeting the ownership requirements of paragraph (a) of this section, a 
not-for-profit organization may rely on the addresses of record of its 
individual beneficiaries and supporters to determine the residence of 
an individual beneficiary or supporter, within the meaning of paragraph 
(b)(2)(i)(B) of this section, to the extent required under paragraph 
(b)(4) of this section, provided that--
    (A) The addresses of record are not nonresidential addresses such 
as a post office box or in care of a financial intermediary;
    (B) The officers, directors or administrators of the organization 
do not know or have reason to know that the individual beneficiaries or 
supporters do not reside at that address; and
    (C) The foreign corporation seeking qualified foreign corporation 
status receives the statement required in paragraph (d)(4)(iv) of this 
section from the not-for-profit organization.
    (vi) Special rule for a foreign airline covered by an air services 
agreement. A foreign airline that is covered by a bilateral Air 
Services Agreement in force between the United States and the qualified 
foreign country in which the airline is organized may rely exclusively 
on the Air Services Agreement currently in effect and will not have to 
otherwise substantiate its ownership under this section, provided that 
the United States has not waived the ownership requirements in the 
agreement or that the ownership requirements have not otherwise been 
made ineffective. Such an airline will be treated as owned by qualified 
shareholders resident in the country where the foreign airline is 
organized.
    (vii) Special rule for taxable nonstock corporations. Any stock in 
a foreign corporation seeking qualified foreign corporation status that 
is owned by a taxable nonstock corporation will be treated as owned, in 
any taxable year, by the recipients of distributions made during that 
taxable year, as set out in paragraph (c)(5) of this section. The 
taxable nonstock corporation may treat the address of record in its 
distribution records as the residence of any recipient if--
    (A) An individual recipient's address is in a qualified foreign 
country and is a specific street address and not a nonresidential 
address, such as a post office box or in care of a financial 
intermediary or stock transfer agent;
    (B) The address of a nonindividual recipient's principal place of 
business is in a qualified foreign country;
    (C) The officers and directors of the taxable nonstock corporation 
neither know nor have reason to know that the recipients do not reside 
or have their principal place of business at such addresses; and
    (D) The foreign corporation receives the statement described in 
paragraph (d)(4)(v)(D) of this section from the taxable nonstock 
corporation intermediary.
    (viii) Special rule for closely-held corporations traded in the 
United States. To demonstrate that a class of stock is not closely-held 
for purposes of Sec.  1.883-2(d)(3)(i), a foreign corporation whose 
stock is traded on an established securities market in the United 
States may rely on current Schedule 13D and Schedule 13G filings with 
the Securities and Exchange Commission to identify its 5-percent 
shareholders in each class of stock relied upon to meet the regularly 
traded test, without having to make any independent investigation to 
determine the identity of the 5-percent shareholder. However, if any 
class of stock is determined to be closely-held within the meaning of 
Sec.  1.883-2(d)(3)(i), the publicly traded corporation cannot satisfy 
the requirements of Sec.  1.883-2(e) unless it obtains sufficient 
documentation described in this paragraph (d) to demonstrate that the 
requirements of Sec.  1.883-2(d)(3)(ii) are met with respect to the 5-
percent shareholders.
    (4) Ownership statements from shareholders--(i) Ownership 
statements from individuals. An ownership statement from an individual 
is a written statement signed by the individual under penalties of 
perjury stating--
    (A) The individual's name, permanent address, and country where the 
individual is fully liable to tax as a resident, if any;
    (B) If the individual was not a resident of the country for the 
entire taxable year of the foreign corporation seeking qualified 
foreign corporation status, each of the foreign countries in which the 
individual resided and the dates of such residence during the taxable 
year of such foreign corporation;
    (C) If the individual directly owns stock in the corporation 
seeking qualified foreign corporation status, the name of the 
corporation, the number of shares in each class of stock of the 
corporation that are so owned, and the period of time during the 
taxable year of the foreign corporation during which the individual 
owned the stock;
    (D) If the individual directly owns an interest in a corporation, 
partnership, trust, estate or other intermediary that directly or 
indirectly owns stock in the corporation seeking qualified foreign 
corporation status, the name of the intermediary, the number and class 
of shares or amount and nature of the interest of the individual in 
such intermediary, and the period of time during the taxable year of 
the corporation seeking qualified foreign

[[Page 51414]]

corporation status during which the individual held such interest;
    (E) To the extent known by the individual, a description of the 
chain of ownership through which the individual owns stock in the 
corporation seeking qualified foreign corporation status, including the 
name and address of each intermediary standing between the intermediary 
described in paragraph (d)(4)(i)(D) of this section and the foreign 
corporation and whether this interest is owned either directly or 
indirectly through bearer shares; and
    (F) Any other information as specified in guidance published by the 
Internal Revenue Service (see Sec.  601.601(d)(2) of this chapter).
    (ii) Ownership statements from foreign governments. An ownership 
statement from a foreign government that is a qualified shareholder is 
a written statement--
    (A) Signed by any one of the following--
    (1) An official of the governmental authority, agency or office who 
has supervisory authority with respect to the government's ownership 
interest and who is authorized to sign such a statement on behalf of 
the authority, agency or office; or
    (2) The competent authority of the foreign country (as defined in 
the income tax convention between the United States and the foreign 
country); or
    (3) An income tax return preparer that, for purposes of this 
paragraph (d)(4)(ii) only, shall mean a firm of licensed or certified 
public accountants, a law firm whose principals or members are admitted 
to practice in one or more states, territories or possessions of the 
United States or the country of such government, or a bank or other 
financial institution licensed to do business in such foreign country 
and having assets at least equivalent to 50 million U.S. dollars and 
who is authorized to represent the government or governmental 
authority; and
    (B) That provides--
    (1) The title of the official or other person signing the 
statement;
    (2) The name and address of the government authority, agency or 
office that has supervisory authority and, if applicable, the income 
tax preparer which has prepared such ownership statement;
    (3) The information described in paragraphs (d)(4)(i)(C) through 
(E) of this section (as if the language applied ``government'' instead 
of ``individual'') with respect to the government's direct or indirect 
ownership of stock in the corporation seeking qualified resident 
status;
    (4) In the case of an ownership statement prepared by an income tax 
return preparer, a statement under penalties of perjury identifying the 
documentation relied upon in the conduct of due diligence for the 
taxable year to determine the aggregate government investment in the 
stock of the shipping or aircraft company in preparation of such 
ownership statement attached to a valid power of attorney to represent 
the taxpayer for the taxable year; and
    (5) Any other information as specified in guidance published by the 
Internal Revenue Service (see Sec.  601.601(d)(2) of this chapter).
    (iii) Ownership statements from publicly-traded corporate 
shareholders. An ownership statement from a publicly-traded corporation 
that is a direct or indirect owner of the corporation seeking qualified 
foreign corporation status is a written statement, signed under 
penalties of perjury by a person that would be authorized to sign a tax 
return on behalf of the shareholder corporation containing the 
following information--
    (A) The name of the country in which the stock is primarily traded;
    (B) The name of the established securities market or markets on 
which the stock is listed;
    (C) A description of each class of stock relied upon to meet the 
requirements of Sec.  1.883-2(d)(1), including the number of shares 
issued and outstanding as of the close of the taxable year;
    (D) For each class of stock relied upon to meet the requirements of 
Sec.  1.883-2(d)(1), if one or more 5-percent shareholders, as defined 
in Sec.  1.883-2(d)(3)(i), own in the aggregate 50 percent or more of 
the vote and value of the outstanding shares of that class of stock for 
more than half the number of days during the taxable year--
    (1) The days during the taxable year of the corporation in which 
the stock was closely-held without regard to the exception in paragraph 
(d)(3)(ii) of this section and the percentage of the vote and value of 
the class of stock that is owned by 5-percent shareholders during such 
days;
    (2) For each qualified shareholder who owns or is treated as owning 
stock in the closely-held block upon whom the corporation intends to 
rely to satisfy the exception to the closely-held test of Sec.  1.883-
2(d)(3)(ii)--
    (i) The name of each such shareholder;
    (ii) The percentage of the total value of the class of stock held 
by each such shareholder and the days during which the stock was held;
    (iii) The address of record of each such shareholder; and
    (iv) The country of residence of each such shareholder, determined 
under paragraph (b)(2) or (d)(3) of this section;
    (E) The information described in paragraphs (d)(4)(i)(C) through 
(E) of this section (as if the language applied ``publicly-traded 
corporation'' instead of ``individual'') with respect to the publicly-
traded corporation's direct or indirect ownership of stock in the 
corporation seeking qualified resident status; and
    (F) Any other information as specified in guidance published by the 
Internal Revenue Service (see Sec.  601.601(d)(2) of this chapter).
    (iv) Ownership statements from not-for-profit organizations. An 
ownership statement from a not-for-profit organization (other than a 
pension fund as defined in paragraph (b)(5) of this section) is a 
written statement signed by a person authorized to sign a tax return on 
behalf of the organization under penalties of perjury stating--
    (A) The name, permanent address, and principal location of the 
activities of the organization (if different from its permanent 
address);
    (B) The information described in paragraphs (d)(4)(i)(C) through 
(E) of this section (as if the language applied ``not-for-profit 
organization'' instead of ``individual'');
    (C) A representation that the not-for-profit organization satisfies 
the requirements of paragraph (b)(4) of this section; and
    (D) Any other information as specified in guidance published by the 
Internal Revenue Service (see Sec.  601.601(d)(2) of this chapter).
    (v) Ownership statements from intermediaries--(A) General rule. The 
foreign corporation seeking qualified foreign corporation status under 
the shareholder stock ownership test must obtain an intermediary 
ownership statement from each intermediary standing in the chain of 
ownership between it and the qualified shareholders on whom it relies 
to meet this test. An intermediary ownership statement is a written 
statement signed under penalties of perjury by the intermediary (if the 
intermediary is an individual) or a person who would be authorized to 
sign a tax return on behalf of the intermediary (if the intermediary is 
not an individual) containing the following information--
    (1) The name, address, country of residence, and principal place of 
business (in the case of a corporation or partnership) of the 
intermediary, and, if

[[Page 51415]]

the intermediary is a trust or estate, the name and permanent address 
of all trustees or executors (or equivalent under foreign law), or if 
the intermediary is a pension fund, the name and permanent address of 
place of administration of the intermediary;
    (2) The information described in paragraphs (d)(4)(i)(C) through 
(E) of this section (as if the language applied ``intermediary'' 
instead of ``individual'');
    (3) If the intermediary is a nominee for a shareholder or another 
intermediary, the name and permanent address of the shareholder, or the 
name and principal place of business of such other intermediary;
    (4) If the intermediary is not a nominee for a shareholder or 
another intermediary, the name and country of residence (within the 
meaning of paragraph (b)(2) of this section) and the proportionate 
interest in the intermediary of each direct shareholder, partner, 
beneficiary, grantor, or other interest holder (or if the direct holder 
is a nominee, of its beneficial shareholder, partner, beneficiary, 
grantor, or other interest holder), on which the foreign corporation 
seeking qualified foreign corporation status intends to rely to satisfy 
the requirements of paragraph (a) of this section. In addition, such 
intermediary must obtain from all such persons an ownership statement 
that includes the period of time during the taxable year for which the 
interest in the intermediary was owned by the shareholder, partner, 
beneficiary, grantor or other interest holder. For purposes of this 
paragraph (d)(4)(v)(A), the proportionate interest of a person in an 
intermediary is the percentage interest (by value) held by such person, 
determined using the principles for attributing ownership in paragraph 
(c) of this section;
    (5) If the intermediary is a widely-held corporation with 
registered shareholders owning less than one percent of the stock of 
such widely-held corporation, the statement set out in paragraph 
(d)(4)(v)(B) of this section, relating to ownership statements from 
widely-held intermediaries with registered shareholders owning less 
than one percent of such widely-held intermediaries;
    (6) If the intermediary is a pension fund, within the meaning of 
paragraph (b)(5) of this section, the statement set out in paragraph 
(d)(4)(v)(C) of this section, relating to ownership statements from 
pension funds;
    (7) If the intermediary is a taxable nonstock corporation, within 
the meaning of paragraph (c)(5) of this section, the statement set out 
in paragraph (d)(4)(v)(D) of this section, relating to ownership 
statements from intermediaries that are taxable nonstock corporations; 
and
    (8) Any other information as specified in guidance published by the 
Internal Revenue Service (see Sec.  601.601(d)(2) of this chapter).
    (B) Ownership statements from widely-held intermediaries with 
registered shareholders owning less than one percent of such widely-
held intermediary. An ownership statement from an intermediary that is 
a corporation with at least 250 registered shareholders, but that is 
not a publicly-traded corporation within the meaning of Sec.  1.883-2, 
and that relies on paragraph (d)(3)(ii) of this section, relating to 
the special rule for registered shareholders owning less than one 
percent of widely-held corporations, must provide the following 
information in addition to the information required in paragraph 
(d)(4)(v)(A) of this section--
    (1) The aggregate proportionate interest by country of residence in 
the widely-held corporation of such registered shareholders or other 
interest holders whose address of record is a specific street address 
and not a nonresidential address, such as a post office box or in care 
of a financial intermediary or stock transfer agent; and
    (2) A representation that the officers and directors of the widely-
held intermediary neither know nor have reason to know that the 
individual shareholder does not reside at his or her address of record 
in the corporate records; and
    (3) Any other information as specified in guidance published by the 
Internal Revenue Service (see Sec.  601.601(d)(2) of this chapter).
    (C) Ownership statements from pension funds--(1) Ownership 
statements from government pension funds. A government pension fund (as 
defined in paragraph (b)(5)(ii) of this section) that relies on 
paragraph (d)(3)(iii) of this section (relating to the special rules 
for pension funds) generally must provide the documentation required in 
paragraph (d)(4)(v)(A) of this section, and, in addition, the 
government pension fund must also provide the following information--
    (i) The name of the country in which the plan is administered;
    (ii) A representation that the fund is established exclusively for 
the benefit of employees or former employees of a foreign government, 
or employees or former employees of a foreign government and 
nongovernmental employees or former employees that perform or performed 
governmental or social services;
    (iii) A representation that the funds that comprise the trust are 
managed by trustees who are employees of, or persons appointed by, the 
foreign government;
    (iv) A representation that the trust forming part of the pension 
plan provides for retirement, disability, or death benefits in 
consideration for prior services rendered;
    (v) A representation that the income of the trust satisfies the 
obligations of the foreign government to the participants under the 
plan, rather than inuring to the benefit of a private person; and
    (vi) Any other information as specified in guidance published by 
the Internal Revenue Service (see Sec.  601.601(d)(2) of this chapter).
    (2) Ownership statements from nongovernment pension funds. The 
trustees, directors, or other administrators of the nongovernment 
pension fund, as defined in paragraph (b)(5)(iii) of this section, that 
rely on paragraph (d)(3)(iii) of this section, relating to the special 
rules for pension funds, generally must provide the pension fund's 
intermediary ownership statement described in paragraph (d)(4)(v)(A) of 
this section. In addition, the nongovernment pension fund must also 
provide the following information--
    (i) The name of the country in which the pension fund is 
administered;
    (ii) A representation that the pension fund is subject to 
supervision or regulation by a governmental authority (or other 
authority delegated to perform such supervision or regulation by a 
governmental authority) in such country, and, if so, the name of the 
governmental authority (or other authority delegated to perform such 
supervision or regulation);
    (iii) A representation that the pension fund is generally exempt 
from income taxation in its country of administration;
    (iv) The number of beneficiaries in the pension plan;
    (v) The aggregate percentage interest of beneficiaries by country 
of residence based on addresses shown on the books and records of the 
fund, provided the addresses are not nonresidential addresses, such as 
a post office box or an address in care of a financial intermediary, 
and provided none of the trustees, directors or other administrators of 
the pension fund know, or have reason to know, that the beneficiary is 
not a resident of such foreign country;

[[Page 51416]]

    (vi) A representation that the pension fund meets the requirements 
of paragraph (b)(5)(iii) of this section;
    (vii) A representation that the trustees, directors or other 
administrators of the pension fund have no knowledge, and no reason to 
know, that a pro-rata allocation of interests of the fund to all 
beneficiaries would differ significantly from an actuarial allocation 
of interests in the fund (or, if the beneficiaries' actuarial interest 
in the stock held directly or indirectly by the pension fund differs 
from the beneficiaries' actuarial interest in the pension fund, the 
actuarial interests computed by reference to the beneficiaries' 
actuarial interest in the stock);
    (viii) A representation that any overfunding of the pension fund 
would be payable, pursuant to the governing instrument or the laws of 
the foreign country in which the pension fund is administered, only to, 
or for the benefit of, one or more corporations that are organized in 
the country in which the pension fund is administered, individual 
beneficiaries of the pension fund or their designated beneficiaries, or 
social or charitable causes (the reduction of the obligation of the 
sponsoring company or companies to make future contributions to the 
pension fund by reason of overfunding shall not itself result in such 
overfunding being deemed to be payable to or for the benefit of such 
company or companies); or that the foreign country in which the pension 
fund is administered has laws that are designed to prevent overfunding 
of a pension fund and the funding of the pension fund is within the 
guidelines of such laws; or that the pension fund is maintained to 
provide benefits to employees in a particular industry, profession, or 
group of industries or professions, and that employees of at least 10 
companies (other than companies that are owned or controlled, directly 
or indirectly, by the same interests) contribute to the pension fund or 
receive benefits from the pension fund; and
    (ix) Any other information as specified in guidance published by 
the Internal Revenue Service (see Sec.  601.601(d)(2) of this chapter).
    (3) Time for making determinations. The determinations required to 
be made under this paragraph (d)(4)(v)(C) shall be made using 
information shown on the records of the pension fund for a date during 
the foreign corporation's taxable year to which the determination is 
relevant.
    (D) Ownership statements from taxable nonstock corporations. An 
ownership statement from an intermediary that is a taxable nonstock 
corporation must provide the following information in addition to the 
information required in paragraph (d)(4)(v)(A) of this section--
    (1) With respect to paragraph (d)(4)(v)(A)(7) of this section, for 
each beneficiary that is treated as a qualified shareholder, the name, 
address of residence (in the case of an individual beneficiary, the 
address must be a specific street address and not a nonresidential 
address, such as a post office box or in care of a financial 
intermediary; in the case of a nonindividual beneficiary, the address 
of the principal place of business) and percentage that is the same 
proportion as the amount that the beneficiary receives in the tax year 
bears to the total net income of the taxable nonstock corporation in 
the tax year;
    (2) A representation that the officers and directors of the taxable 
nonstock corporation neither know nor have reason to know that the 
individual beneficiaries do not reside at the address listed in 
paragraph (d)(4)(v)(D)(1) of this section or that any other 
nonindividual beneficiary does not conduct its primary activities at 
such address or in such country of residence; and
    (3) Any other information as specified in guidance published by the 
Internal Revenue Service (see Sec.  601.601(d)(2) of this chapter).
    (5) Availability and retention of documents for inspection. The 
documentation described in paragraphs (d)(3) and (4) of this section 
must be retained by the corporation seeking qualified foreign 
corporation status (the foreign corporation) until the expiration of 
the statute of limitations for the taxable year of the foreign 
corporation to which the documentation relates. Such documentation must 
be made available for inspection by the Commissioner at such time and 
place as the Commissioner may request in writing.
    (e) Reporting requirements. A foreign corporation relying on the 
qualified shareholder stock ownership test of this section to meet the 
stock ownership test of Sec.  1.883-1(c)(2) must provide the following 
information in addition to the information required in Sec.  1.883-
1(c)(3) to be included in its Form 1120-F, ``U.S. Income Tax Return of 
a Foreign Corporation,'' for each taxable year. The information should 
be current as of the end of the corporation's taxable year. The 
information must include the following--
    (1) A representation that more than 50 percent of the value of the 
outstanding shares of the corporation is owned (or treated as owned by 
reason of paragraph (c) of this section) by qualified shareholders for 
each category of income for which the exemption is claimed;
    (2) With respect to each individual qualified shareholder owning 5 
percent or more of the foreign corporation, applying the attribution 
rules of paragraph (c) of this section, and relied upon to meet the 50 
percent ownership test of paragraph (a) of this section, the name and 
street address, as represented on each such individual's ownership 
statement;
    (3) With respect to all qualified shareholders relied upon to 
satisfy the 50 percent ownership test of paragraph (a) of this section, 
the total percentage of the value of the outstanding shares owned, 
applying the attribution rules of paragraph (c) of this section, by all 
qualified shareholders resident in a qualified foreign country, by 
country; and
    (4) Any other relevant information specified by the Form 1120-F and 
its accompanying instructions.


Sec.  1.883-5  Effective dates.

    (a) General rule. Sections 1.883-1 through 1.883-4 apply to taxable 
years of a foreign corporation seeking qualified foreign corporation 
status beginning 30 days or more after August 26, 2003.
    (b) Election for retroactive application. Taxpayers may elect to 
apply Sec. Sec.  1.883-1 through 1.883-4 for any open taxable year of 
the foreign corporation beginning after December 31, 1986, except that 
the substantiation and reporting requirements of Sec.  1.883-1(c)(3) 
(relating to the substantiation and reporting required to be treated as 
a qualified foreign corporation) or Sec. Sec.  1.883-2(f), 1.883-3(d) 
and 1.883-4(e) (relating to additional information to be included in 
the return to demonstrate whether the foreign corporation satisfies the 
stock ownership test) will not apply to any year beginning before 
September 25, 2003. Such election shall apply to the taxable year of 
the election and to all subsequent taxable years beginning before 
September 25, 2003.
    (c) Transitional information reporting rule. For taxable years of 
the foreign corporation beginning 30 days or more after August 26, 
2003, and until such time as the Form 1120-F, ``U.S. Income Tax Return 
of a Foreign Corporation,'' or its instructions are revised to provide 
otherwise, the information required in Sec.  1.883-1(c)(3) and Sec.  
1.883-2(f), Sec.  1.883-3(d) or Sec.  1.883-4(e), as applicable, must 
be included on a written statement attached to the Form 1120-F and 
filed with the return.

[[Page 51417]]

PART 602--OMB CONTROL NUMBERS UNDER THE PAPERWORK REDUCTION ACT

0
Par. 5. The authority citation for part 602 continues to read as 
follows:

    Authority: 26 U.S.C. 7805.

0
Par. 6. In Sec.  602.101, paragraph (b) is amended by adding entries in 
numerical order to the table to read as follows:


Sec.  602.101  OMB Control numbers.

* * * * *
    (b) * * *

------------------------------------------------------------------------
                                                            Current OMB
   CFR part or section where identified and described       control No.
------------------------------------------------------------------------
 
                              * * * * * * *
1.883-1.................................................       1545-1677
11.883-2................................................       1545-1677
1.883-3.................................................       1545-1677
1.883-4.................................................       1545-1677
1.883-5.................................................       1545-1677
 
                              * * * * * * *
------------------------------------------------------------------------


Robert E. Wenzel,
Deputy Commissioner for Services and Enforcement.
    Approved: July 11, 2003.
Pamela F. Olson,
Assistant Secretary of the Treasury (Tax Policy).
[FR Doc. 03-21354 Filed 8-25-03; 8:45 am]
BILLING CODE 4830-01-P